02/10/2008 - With a banking collapse, what can we now rely on?
by HO
Now even the top end is showing itself to be vulnerable
It is three or four weeks since our last bulletin and what a tumultuous few weeks they have been.
Whilst everyone looks to blame the fool who borrowed more than his house was worth, or the lender who gave more than he had to lend, or the regulator who consented to the financial instruments that allowed it all, we have to accept that cheap and available credit was always going to be too tempting to turn down.
We too saw the opportunity at the start of the new millennium, when base rates hit a 30 year low and confidence had been given a big knock with the bursting of the dot.com bubble. However what started as an opportunity to capitalise on, soon became a free for all binge. In our view the warning signs were flashing brightly in 2006. The title of our bulletin posted on the website in October 2006 was ‘Is this the last Hurrah!’ We don’t mind admitting that in 2006 and 2007 we acquired barely a handful of investment property for our clients. Competition amongst buyers was intense, cost of finance had started to creep back up and yields had gone from borderline to breadline. We stood back as buyers created an artificial market amongst themselves resulting in a situation where asking prices were simply guide prices to attract competitive bidding.
The dramatic reversal in sentiment and activity has led to a near moratorium on transactions in certain areas. We have made our views clear on certain sectors that flourished on naïve ‘jam today’ buy-to-let investors. The chickens are coming home to roost for the developers who not only chose to ride this band wagon, but went out of their way to encourage it. An article in the Daily Telegraph this week reported that Barratt Homes (a well established house builder) was offering discounts of up to 50% in Leeds to address a market where just 6 new build units have been sold in the entire city over the past 2 months.
No one knows how things will play out and how long it will be before the credit crunch is being discussed in the past tense. What is apparent however is that well informed investors are once more looking at property as being a tangible and secure asset having seen their wider investment portfolios severely battered. This is somewhat of a paradox of course given that the whole credit crunch issue was built upon a massive housing bubble, however canny investors can recognise real opportunities arising in an asset class that they understand and where specific opportunities can be extrapolated from a speculative mass of mediocre to fundamentally flawed, overvalued and over hyped junk.
With the entire banking sector undergoing a complete transformation and the fallout from the likes of Lehmans, Merrill Lynch etc. reverberating throughout the wider economy, it is clear that the upper end of the market is not, as it was previously believed to be, immune. There is of course a super prime sector that will always be untouched to a degree but at the end of last year this was being referred to as being on property with values at £5m +. By early 2008 this had risen to £10m + and today it is generally discussed in terms of £20m +.
The impact at the upper end is the most appealing for the opportunistic buyer. Certain property and certain addresses are always in severe shortage (a classic first floor lateral flat overlooking a garden square in South Kensington or a family house with both garden and garaging in Chelsea for example), the current market presents an opportunity to acquire such property free of major competition and at values that are sometimes closer to those of 3 years ago.
We will continue to focus on property that we know as being good (i.e in top locations, hard to find in normal market situations and free of any negatives) and where the opportunity exists to acquire this at a substantial discount to its peak price and where value can be added. To this end we will be updating the list attached on all future bulletins as we track those that we identify.
The following are current highlighted opportunities;
Stafford Terrace, W8 Circa £1.35m plus refurbishment
A potentially magnificent first floor lateral apartment. Currently arranged as 3-4 bedrooms this would be best reconfigured as a generous two bedroom, two bathroom apartment with study area and great entertaining space.
The flat has been under offer twice and the seller is clearly in a real need to sell. The refurbishment costs would be in the order of £350,000 and we would envisage an end value close to £2m.
Tedworth Square, SW3 Circa £1.75m
A superb three bedroom apartment in excellent condition with large terrace. The flat looks south over the gardens square and lies just five minutes from Sloane Square.
The owners are divorcing and looking for a very swift sale. The flat is achieving around £1,900pw in rent and this represents an excellent investment opportunity
Gledhow Gardens, SW7 Circa £4.25m
A genuinely rare chance to acquire possibly the only first and second floor maisonette which looks directly over the private gardens. The flat has been meticulously refurbished to provide 4 bedroom suites plus excellent entertaining space. Total floor area in the region of 2,500 sq ft.
The Vale, SW3 Circa £11m plus refurbishment
An outstanding house extending to nearly 8,000 sq ft. This is a very special house which offers 7 bedrooms, separate staff accommodation, garden, garaging and a wealth of architectural interest. The Vale is one of Chelsea’s premier streets with a number of spectacular private residencies. The owners are now in urgent need to sell.
Onslow Square, SW7 Circa £2m plus refurbishment
This flat came to the market in February at a hugely inflated price. The seller has bit by bit reduced the asking price from £3.15m to £2.35m and is now suffering as a result.
This is a good flat on the favoured northern side of the square looking directly over the gardens. It offers three bedrooms and 2 bathrooms in an exceptionally well presented building. It requires cosmetic improvement.
Kensington Court, W8 Circa £2m plus refurbishment
A potentially magnificent family apartment on the 4th floor of a well run mansion block with porter. The property extends to around 2,306 sq ft and would provide 4 bedrooms and excellent entertaining space.
The refurbishment costs would be in the order of £450,000. Certain properties in and around Kensington Court achieved in excess of £2,000psf last year. On average, for well refurbished property, prices achieved were around £1,650psf. At a projected end value of £2.85m, this represents around a 25% discount to last year.
Bryanston Square, W1 Circa £775,000
An extremely attractive 2 bed 2 bath maisonette overlooking the garden square. The flat is currently held on a 47 year lease and could be extended by 90 years. For those who might like a hedge against property values falling further, the lease could be extended at a later date. The asking price is £875,000 and the flat would achieve a weekly rent of close to £1,000 pw.
The traditional family house markets in and around Battersea and Wandsworth have been very hard hit. These areas have growing international appeal, particularly with European families, due the establishment of local international schools. The general quality of primary and secondary schools, together with the open spaces of Clapham and Wandsworth Common, ensure that demand is extremely high in more normal economic times. The following are examples of available properties;
Winsham Grove, SW11 Circa £650,000
This 4 bedroom house (1,732 sq ft) was first offered at £925,000. It needs a minor refurbishment to then achieve a rental in the order of £925pw (approx. 5.75% gross)
Broxash Road, SW11 Circa £725,000
A well presented 4 bedroom house (1,670 sq ft) with potential to later extend in to the loft and the side return. This first came to the market asking £845,000. In one of the more sought after roads, the house would achieve around £900pw (approx. 6.25% gross).
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