Undercurrents of a property deal

Tuesday 08th September 2015 13:42 EDT

We finally exchanged on a property in Southwick Street, purchased for £3.7m and sold for £4.5m only 10 months later. The property was a freehold building consisting of 6,700 sq. ft., part residential and part commercial.

There were a lot of undercurrents which were going on whilst the sale was going through; some of which were created by me, others I was oblivious too until after the sale, and only then was I informed about them. From my side whilst the sale was going through I was pushing to get a higher offer. This had to be done discreetly, so as not to disrupt the current sale.

I had contacted several agents, one which was one of London’s top three agents, another specialised in selling only commercial throughout the UK, and yet another was an independent old boy who was based close to the property. Everyone got me an offer, but they were far from the mark, they were all floating around the £4.2 - £4.3m mark.

I was actually surprised as I thought given the lack of freehold stock in this location this would be an easy sell, the market however thought differently.

After the deal was done the agent who brought the buyer to us told me there were many times the buyer wanted to pull out as he felt he was paying too much for the property, unsurprising as we had bought it for cheaper only months ago, but there again this is London and prices rise even as you breath. He was even contemplating ‘chipping’ the price at the point of exchange, this is an annoying thing to do, it means just as your lawyers are ready to exchange contracts the buyers reduce the price at the last minute, in the hope the seller compromises on the price they will accept. If this were to have been attempted we would have pulled out of the sale and maybe even increased the price as we were under no pressure to sell.

Luckily I wasn't exposed to any of this negativity as the agent managed to hold the deal together and categorically told the buyer a last minute attempt at chipping the price would not work and consequently he may lose the sale altogether. However judging from the feedback I got from the market it seems he did overpay for the property. Although in due course of time it will not matter.

There are some Mews houses which were bought in June 2010 for a client, for which we paid £1.65m through a Barnard Marcus Auction. At the time the price was driven up by an overzealous bidder sitting to the rear of the room. We had been tracking the deal for a number of years at a far lower price of £1.2m - £1.3m. This was one of those deals which had been floating around the market for a long time and therefore had gained a bad smell to it. Psychologically no one wants a deal which has been floating around the market for too long it gets stale.

However I would estimate the price of each of these four units to be touching in the region of £1.5m, therefore the site would be worth around £6m now. The construction cost was in the region of £500k, therefore in the course of time paying a few hundred thousand is almost immaterial; although at the time it can be painful. Needless to say this investor has done well from this investment even though at the time it was perceived they overpaid for this site. They are not in the market to ever sell the properties they buy, they mainly gather stock. This was bought along with various properties they had purchased through us, some ex-local in prime locations and private properties too.

One particular property was very lucrative, it was purchased for £237k. It was a large one bedroom duplex ex council property which therefore means low service charges. With less than £10,000 spent on the property it was transformed into a two bedroom flat and shot up in value almost overnight. The property would be worth currently £450k conservatively.

If the location is right, even if you have overpaid you will probably come out smelling of roses. However if the location is not correct even if you buy cheaply the growth will be stunted or even negative. This is something I have learnt firsthand, with an off plan purchase in Birmingham City Centre which was purchased with the benefit of a 15% discount from the market price of £165k. At the time we paid £140k for the property, this was over a decade ago. The current market price seems to be floating around the £125k level, so the property as gone down in value over the ten years it has been held; and this is no suburb location, it is right in the City Centre of Birmingham. Ordinarily many investors choose to purchase outside of London driven by the attractive yields you can obtain, so even though the capital growth is nonexistent - or even negative, double digit yields will ensure you get a regular monthly cash flow. In this situation however even this was not forthcoming, after the service charge and mortgage payments were made this was an investment which was eating up money on a monthly basis. Not the best investment made, but a lesson to be learnt.

Recently we have had several clients one after another who are specifically after deals in Central London to hold on a long term basis. The bar to purchase these kinds of properties has been raised higher now. Five years ago you could purchase a two bedroom property in Central London for £300k ex council, now you would be looking at £500k plus.

They all need to extract equity from their current properties in order to fund their purchases. A couple of them having purchased previously in inner London boroughs have already tasted the growth these investments can achieve. A few realise without making this move they will not be able to progress financially, the amount the property will increase in value, they will not be able to save.  

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