The bubble within a bubble

Wednesday 19th August 2015 09:12 EDT

Yesterday I got a call to see a ‘deal’; the property was in the creme de la creme location of Eaton Square, SW1, a most coveted place to stay in the world over. Owing the property allows you access into the square which even has a couple of tennis courts.

The property is indeed stunning, its location is right in the middle of the square. One issue is that the lease is only three and a half years. Of course the first question to be asked was the renewal - this was quoted at £4.8m, with Grosvenor being the freeholder. However this lease extension doesn't take you up to 90 years as with all other lease extensions, this one is unenfranchiseable, it has a cap - it cannot be extended for more than 20 years.

The property is clearly a probate, you can always tell by the outdated wallpapers, furniture and musty smell coming from the carpet. It is a huge 3,500 sq. ft. lateral flat with huge ceiling heights; this is a very good property.

However try as I might I just cannot get my head around the property prices, it’s not a patch I'm familiar with. I was told the property done up would fetch anywhere between £8m to £10m. You would need to purchase the property for £850,000 and then spend conservatively £500k on the property and then extend the lease for £4.8m, this would take you to over £6m.

Even if the property sells for £8m by the time you have paid your entry and exit costs I cannot see the margin. Furthermore I cannot see how anyone would in effect buy a property which they’re not really purchasing, they are renting. At £8m this equates to £400k per year or £8k per week. I’m sure you can get a pretty good property for an £8k per week budget. This doesn't take into account the service charge which stands at £40k per annum.

At these levels I appreciate it attracts the uber wealthy, but that doesn't mean they are stupid, often those with money are harder to convince to part with it.

The resell price, though a little optimistic, is not unheard of; there are properties on the market at these levels. However as with anything the higher you go the longer it takes to sell the property. Ordinarily when purchasing a leasehold property as the lease decreases the price rise more than compensates for it.

Here it would be a worry on a twenty year lease, every year which goes by the lease decreases by 5%. To resell a property of this size I would imagine will take years and not months.

The trader who is selling the property on was very excited about it, and had just purchased the property on Friday, seeing the property earlier in the day and exchanging on it by the evening; the early bird catches the worm! He also disclosed to me what he paid for the property, which was substantially less than he was selling it for.

I suspect he will not get anywhere near his asking price, he has a long completion - until the end of October, which should give him enough time to sell the deal on. I don’t think this will be a deal we are likely to enter for many reasons. This is not a patch I understand very well and I am unsure as to the financing possibilities with such a short lease the costs of getting this wrong are very high. This square seems to have its own bubble even in relation to Central London property market.

We have secured a couple of deals this week. One is a site in Bushey, a prime part of Bushey, as I understand there are not so desirable areas too. This property is a commercial but comes with the planning permission for 6 residential units, 4 two bedrooms and the other 2 one bedrooms. The property looks like a Georgian building but it’s not, it’s merely a replica, which is a good thing for if it had been it would have been both a more expensive and time consuming job.

The square footage of the propriety finished will be 4,000 sq. ft., it has an expected resell of £2.4m, which equates to £600 per sq. ft., which sounds about right for the location. This will be roughly £400k per unit, which is right.

As the property will be a conversion the costs for refurbishment should be pretty low. I have got very surface level quotes of circa £300k, this allows a generous margin on the deal. As offices the building is producing £70k per annum which is a good yield on £1.1m. With prime properties in London you can expect 2-3% currently.

Rather than disposing of the development and cashing in, you could keep the asset and refinance once completed. This would allow you to extract your original injection of cash. Even if you can take out 60% of the value you will have got £1.4m out of the deal.

Only on Friday we secured a large site in Greenford, this is more speculative, as it comes without planning. The property is being purchased vacant, and has a huge floor plate of over 13,000 sq. ft., because this site comes without planning it means in theory there is more room for profits.

There are also more options, just like we are buying the deal mentioned above with planning, the same can be done with this, except the other way round - we do not have to build this deal out, simply by doing paperwork and securing the planning we can add value to the property without getting our hands dirty.

The issues in purchasing properties without planning is the financing, your only option as far as I'm aware will be the bridging lenders which will lend at about 1% per month, this can work if the deal is lucrative enough but planning can take longer than expected and things can come out of the wood work during the application. Time alone can tip the scale from being a profitable venture to a loss making one. This needs to be considered and generous time lines put into this project to ensure there is no chance of it sliding down.

Both of these opportunities are available for investment, we believe these are both very lucrative opportunities. Call the office now if you would like to invest. 

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