We have been scouring the auctions, in order to find a deal; and it’s tough to find the margins we require, in London anyhow. The properties we analysed were priced up to what they were worth, though admittedly the numbers we use to assess deals tend to be pessimistic.
The issue is everyone can pretty much assess the end value of a building in 15mins max with help from websites like Rightmove and Zoopla. The build costs have a wider margin of variability. When getting quotes for projects we have had quotes which vary in price by 80% and even higher. In this environment you have the added issuing of nailing a builder down regardless of the price as currently there is a shortage of labour in the building sector. This has resulted in them being choosy about which jobs they take and at what price.
The end value is generally the overriding factor in assessing a deal, the build cost will eat into your margin depending on the quote, but usually won’t kill the deal.
We usually start from the end value and then work backwards taking off the expected costs to get down to the price we would pay for the deal.
We looked at perhaps all the shop and upper lots coming into what are probably the last auctions of this year, and there was not enough margin in any of them to satisfy us.
Does that mean they will not sell? Not at all. The is a lot of money wanting a nice solid safe place to stay, and there’s nothing like property to satisfy this need.
Several months back we were geared up to bid for a site in Harrow & Wealdstone, it came with planning for a shop and two flats; the guide was £200K, the next door was selling for £675K, and was on the market looking for a buyer. This was a developed shop with two large flats, needing work but the bones of the building were intact, so no structural work was required. The build cost we were quoted for the site was £350K.
The property ended up going for £331K, which makes absolutely no sense. My only rationale was somebody simply wanted this property as it was local to them, and it was in an area which has the highest concentration of Gujaratis, many like to purchase simply because the site is local to them. In short, it seems the reasons were based on sentiment and whims, rather than an objective investment. Or perhaps the buyer was a builder planning on doing the work themselves.
Therefore, in order to seek a deal which has sufficient margin we have had to shift our sights further afield. We still need to ensure the end value is reasonably strong and the demand is strong.
The end value is reasonably easy to ascertain, but it always pays to dig deeper and get the local knowledge, as there are variations in price according to local factors which are imperceptible to someone sitting behind a PC.
This is when the numbers finally clicked, and the deals started to become justifiable. As long as the site is close to transport, and enough digging is done locally, I think this would be a very lucrative direction to pursue. Currently we are analysing a deal around the £500K mark, which ticks all of our boxes.