23/04/2009 - A return to the long term merits of bricks and mortar
by HO
As buyers return, being clear on strategy is vital.
KINDLY SEE MARKET COMMENT AND OPPORTUNITY UPDATE BELOW
Highlighted opportunities are;
Courtfield Gardens, South Kensington, SW5 target price £4m
REPOSSESSION
This is a freehold period building converted in to 8 apartments. It was ‘sold’ for £6m and contracts were exchanged some 18 months ago. The buyer then failed to complete the contract as the market collapsed.
The property is being sold on instructions of the receivers. The bank acting for the vendor in repossession are looking for a sale that is in effect a simultaneous exchange and completion. An offer of £4.2m was recently accepted but the buyer could not get funding.
As a rough guide, the units would produce a gross income of £220,000. To get this return the property would need in the order of £450,000 spent on upgrading and basic furniture packages.
The bank are saying that an offer of just in excess of£4m is the lowest that could be agreed, we have put up an offer at £3.8m that has been rejected. Gross costs (purchase, plus stamp duty fees & upgrade) would be around £4.75m. There may be a way to mitigate stamp duty and maybe improve the yield slightly to get around 5% or so Gross. Depending on gearing the net yield could be around 4%.
Ennismore Mews, Knightsbridge, SW7 target price £1.25m
PRESSURED SELLER
An excellent mews house on one of Knightsbridge’s prettiest mews. Ennismore Mews is in the heart of Knightsbridge Village just a short walk from Harrods etc.
This 3 bedroom house (approx. 1,155 sq ft) has been well refurbished in a contemporary style. Whilst on the open market at £1.55m (reduced from £1.85m), the owner has come directly to us as he is in urgent need of a sale.
The property would let for around £1,200 pw showing a gross 5% yield on our target purchase price.
St John’s Wood, NW8 target price £1.85m +
BUYERS IN DEFAULT
Strictly confidential. An impressive development of 25 apartments. The developer sold all but the two penthouses (both circa 4,000 sq ft) and all but 7 have defaulted on their contracts. Some are currently trying to renegotiate but others have walked away completely as the project is now being handed over in its completed state.
We have direct access to the developers via their bankers and there is a significant opportunity to deal on several of these units. This is completely off market and only Obbard have been approached on this.
The apartments are either 3 bedroom units at 1,600 sq ft, or 4 bedroom units at close to 3,000 sq ft. All have secure parking and the building has 24 hour porter and concierge.
Dorset Street, Marylebone, W1 target price £1.2m
SUBSTANTIALLY REDUCED
A very bright apartment currently arranged as 4 bedrooms, but best used as a 3 bedroom, 3 bathroom flat. It is in excellent order and all one needs to do is convert a small bedroom in to an large master bathroom.
The block itself is very well maintained and has very low annual outgoings. The GFA is approx. 1,349 sq ft. Originally on for £1.65m, the price has just been reduced from £1.4m to £1.295m.
Chester Row, Belgravia, SW1 target price £1.5m
REPOSSESSION
An excellent leasehold house (approx. 2,300 sq ft) in the heart of Belgravia. The developer has gone bust and this is now a repossession. The current lease of 31 years can be extended by 90 years or the freehold acquired for around £900,000. The house requires around £400,000 to complete the works.
The bank have quoted us £1.6m for a quick disposal but we would see a purchase at £1.5m to offer a potential £750,000 net profit.
Evelyn Gardens, South Kensington, SW3, target price £2.25m
COUPLE IN RETIREMENT NEEDING SWIFT SALE
A really lovely south facing family apartment having direct access to communal gardens. The flat has two large reception rooms with high ceilings, an eat-in kitchen and 3 large double bedrooms and 3 bathrooms. Although very well presented it needs updating.
This is about to come to the market at £2.75m for the Share of Freehold. The GFA is approx 2,450 sq ft.
Holland Villas Road, Holland Park, W14 target price £11m
POTENTIAL PURCHASE at 30% BELOW PREVIOUSLY AGREED PRICE
One of the very last completely un-modernised Victorian detached villas on this prestigious road. Not advertised on the open market. The house is currently arranged as six flats and there is planning permission to convert it back into one residence. The house was under offer at £16M last year but the deal fell through following the collapse of Lehman Bros and could now be bought for around £11M.
At this price it represents a 35-40% reduction on peak value and there is potential to make a 30% return on investment based on recent comparables. There is also further potential to make money by way of acquiring a landlocked property at the end of the garden in due course and selling the land off to neighbors.
Stanford Street, Kensington, W8 target price £1,000,000
PROBATE SALE
A potentially excellent three bedroom apartment (1,437 sq ft) in a well run block in one of Kensington’s best residential areas. The property is a probate sale and the executors are asking £1,200,000 for the share of freehold.
The flat requires around £350,000 to be spent on it with a projected end value at £1.75m
TWO GOOD OPEN MARKET EXAMPLES;
Piccadilly, Mayfair, W1 target price £1.45m
A very spacious two bedroom flat on the fifth floor of a smart modern block (approx. 1,551 sq ft). The flat has been well refurbished but could be slightly updated, it offers well laid out accommodation with a very large reception room. The building adjoins an office block as part of the development and has 24 hour porters and security.
The asking price is £1.75m for the 51 year lease but we believe the owner is need of a quick sale and at under £1,000psf this would be good value with an estimated cost to acquire a 90 year lease extension at around £350,000.
Eaton Square, Belgravia, SW1 target price £2.85m
An excellent two to three bedroom penthouse in one of London’s very best addresses (approx. 1,798 sq ft). The flat needs a cosmetic upgrade to create a very special home. It offers well laid out accommodation with a large reception room overlooking the square gardens.
The asking price is £3.25m for the 64 year lease but we believe an offer at around £2.85m could be accepted and for Eaton Square this would be extremely low.
COMMERCIAL OFFICE OPPORTUNITIES
TRAFALGAR SQUARE, WC2 target price £30m
Not on the market but due to be offered for sale in the near future. The building has almost an island site with natural light on all or part of four sides and views diagonally across into Trafalgar Square. It comprises 45,579 sq ft of which 35,962 is offices, 2,482 and 7,135 retail. Total rent roll is £2.42 million pa of which £1.85 million is attributable to the office tenant (lease expiring 6/2015, currently £51 psf) and the balance to the retail (leases expiring 2018 and 1027 respectively). It will be quoting (indicative at this stage, subject to confirmation) 6.73% Net Initial Yield – ie £34 million or approx £746 psf. It is being sold out of a fund.
WEST END, W1 target price £140m
Two freehold buildings at the entrance to Portman Square. They are for sale separately and have come to us independently of one another. One is 100,000 sq ft of offices , the other 67,000 sq ft of offices , car showroom, and 4 flats. Quoted prices are £87 million (7.5% NIY) and £58 million (6.5% NIY) respectively.
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MARKET COMMENT
In our last two bulletins we have commented on the perhaps surprising surge of interest in the prime London market. This continues apace and we will not dwell on this once more suffice to say that demand at present is very clearly outstripping supply.
It is satisfying to hear investors talk once more about 5-10 year horizons. The era of the quick buck in property has passed and in talking to many of our clients, they feel very comfortable investing in bricks and mortar over the mid to long term. Meanwhile they are willing to take short term positions in more liquid assets as they continue to experience mini cycles suited to more of a trading approach.
In looking longer term, investors need to think through their investment strategy and understand the market’s challenges.
FINDING TENANTS
Tenants, like investment returns, can never be taken for granted. Just as we saw in 2001/2002, central London is experiencing a double whammy. Capital values have been falling and so too have rents. The sales market has appeared to turn a corner recently, as alluded to in my recent bulletins, but rents are continuing to fall where choice is plentiful and quality in short supply.
Estate agents in prime London report rents being off some 10-15% however these figures disguise the truth. In coming up with the 10-15% they will be taking an overall view of their lettings portfolios and comparing rents to last year. What this does is to overlook the fact that real rental levels are where terms are now being agreed on new lets, not on a mixture of new lets and prevailing rates which would have been agreed months or possibly even years back. Most tenants are renegotiating on their renewals and some even mid term.
The good news however is that well presented property that is sensibly priced does let. Landlords who fail to maintain their property, who attempt to stick to the rents they used to get, and choose to ignore the fact that their finance costs, in most cases, have plummeted, only have themselves to blame.
The market for rents above £2,000pw has been hit hardest, as one goes down the scale the adjustment is less pronounced. There are still some headline grabbing rents being achieved (indeed we have a £4,000pw offer on one our flats at present) but these are rarities and should not be assumed within any investment strategy. Rental rates are often the focus for landlords but they should really be more concerned about vacancy and adjusting their rents accordingly.
At the time of writing we have two properties being renovated between tenancies and aside from these our entire portfolio is fully occupied. We even have an offer on one of the properties being renovated. What is particularly comforting is the broad mix of tenants. We are fortunate in that we were never, nor did we ever wish to be, over dependent upon the financial services sector and were always thankful for this.
The following is a graph showing our current tenant profile;
HOW NOT TO SPEND IT
When talking to potential clients we fully understand that our opinions and advice are not always going to be taken on board unquestioningly. For all the things we feel we can boast about, (combined experience of over 60 years, over 300 properties bought, superior returns achieved, strong and loyal client base etc.) we know there is no shortage of others promising sound advice and excellent service.
What gets us is watching potential clients who take the time to meet and listen to us, and others, and then believes the internet provides most of the answers with estate agents (who it is often forgotten are remunerated by the seller) filling in the gaps.
Today the armchair house hunter has the world at the end of his or her mouse. When the likes of Prime Location and Rightmove, coupled with the Land Registry on line, were first launched there was a huge expectation that the demise of the estate agent was nigh. Ironically these tools became more of a help to agents than a hindrance as it introduced a form of multi listing that had never quite established itself in the UK (unlike in the US for example).
The I-search became even more enticing with the introduction of Google Earth and sites such as upmytstreet.com. More recently the introduction of Globrix.com (a web engine that attempts to list all details from agent’s websites) took a step further to the goal of a central database of available property. Now the world is a buzz thanks to GoogleStreet.
We use all these sites but in doing so we recognise the flaws as well as the benefits and they are probably equally matched. Like any person looking to use time efficiently, we don’t want to waste a morning looking at a property that a quick web search can show is by a railway line, opposite a pub with squatters next door. But the internet can only provide so much and the following are two examples where web addicted buyers went wrong;
Un-modernised means cheap?
The first person I am referring to recently agreed to buy an un-modernised flat in Chelsea. The flat is fine, it has a bedroom, one bathroom and a small second bedroom which, due to a large chimney breast, can only accommodate a standard single bed. It is in a very good area, share of freehold and close to public transport. Other people were also interested according to the agent and competing offers were invited by way of sealed bids. The potential client was the ‘lucky’ highest bidder.
He contacted us to discuss the refurbishment and the intention for us to bring it up to the necessary standard and include it within our portfolio. We went to see the flat and he asked for our opinion, which was as follows;
The flat is on the third floor with no lift (albeit the main door to the flat is on the 2nd floor). At the back is a school playground which has the joyful sound of screaming kids twice a day and at the front is the Visa section to a European consulate which often sees large queues resulting in people sitting and smoking on the doorstep. Whilst being very central, the street itself has much passing traffic day and night. Having only one bathroom and a small second bedroom, with no way to reconfigure to add a guest WC or 2nd bathroom, it is in essence a one bedroom flat plus a study. As a result the rental will be more related to an upper end one bedroom flat than a 2 bedroom flat. His refurbishment budget at £100,000 all in was probably going to be £50k light. Due to being on a busy road close to Sloane Square and no lift access, the contractors costs will be significantly higher.
We have done our own basic analysis based on the asking price and this shows a likely gross yield of just 3.3%. The gross yield however is less of an issue, the worry would be potential vacancy as third floor walk ups are not going to be first on a tenants short list with so much choice about. In order for the property to be worth the gross investment (purchase cost, buying costs, refurb etc.), it would need to appreciate in value by nearly 20% and only then could the buyer expect to start seeing any capital gain on the back of an improving market. In the meantime he is facing a potential £150,000 immediate loss should he want to sell.
Paying fees may be a bitter pill but our acquisition fee in this instance would have been approx. £16,000 inc vat and we would have looked to have earned this by ignoring this particular property and finding something where, at the very least, the value at the outset equates to the gross investment. This example would have been a small deal for us, but no less important to produce the right result.
Thankfully there is a happy ending. On the back of our advice the client has withdrawn and is now discussing the possibility of appointing us. Although we pride ourselves on achieving superior returns, we cannot, nor should we, guarantee to beat the market. What we can guarantee is for the equivalent of 50% of your Stamp Duty charge, to make sure our experience knowledge and deeply ingrained scepticism of estate agents will prevent you making very costly errors.
‘I only needed to go on the internet for 20 minutes’
One client who we had acted for before on investment purchases, had a very specific requirement. He wanted a 2-3 bedroom flat near to the Carlton Towers hotel in Knightsbridge for his own use. His budget was £4m. This was when the market was still at its peak in 2007.
We had found a couple of properties but each time there were higher bids and cash buyers looking to close fast. The client went quiet for a few weeks and then happily told us that he had found a 2 bedroom first floor maisonette, with a large terrace with views over the gardens just 2 minutes from the hotel. He was delighted and couldn’t help but tell us that he had simply spent ’20 minutes one evening looking at property websites’.
The flat in question we knew of and it was on the market at £3.25m. It needed refurbishment and the common areas, despite being a period building, were hideous with a 1970’s staircase and low ceilings. One of our staff had seen it and rejected it out of hand, not feeling the need to even tell the client. It was too late, he had bought it at the full asking price which equated to £2,288 per square foot. He knew he had paid over the top but the market was going up by the day and it had everything he wanted. It was also ripe for refurbishment and the selling agent told him it would be worth £4m when refurbished!
This was a seriously compromised flat in a great location and, due to personal circumstances, the client now has to sell. Despite a very top end refurbishment to his own specification he is only able to achieve £2.6m on his sale. A very expensive 20 minute web surf.
Please note that from 1st May 2009 our acquisition fees will increase to 2% + vat. We are having to raise our fees due to the huge interest in our services as clients look for ‘bottom of the cycle’ value whilst needing to avoid mistakes in a market that still offers many pitfalls for the inexperienced investor.
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