Currently, we are analysing a deal which has the double benefit of a healthy discount and is located in a growth area.
We expect to see a growth of about 7 years back to back for this location. The property is a freehold and consists of commercial and uppers. The breakup value of this site is about 20% higher than the purchase price.
There are two commercial units and three residential units. One of the commercial units will be empty on completion. All the others are occupied, generating a yield of 6%.
The aim would be to vacate the remaining commercial unit and convert the whole of downstairs to residential, as the street is primarily a residential street, and actually the commercial units there stick out like a sore thumb. It’s not in keeping with the area. Not that this will have a bearing on the ability of being able to gain permission. Even if there was opposition this change could not be refused, as it’s set by Central rather than local government.
Gaining a discount on a deal is always a good thing; however, if one is looking to keep the asset for a long period, it’s important to see where this area is going over the next five to ten years. This may have a greater bearing on the investment rather than the initial one off incoming discount.
Conversely, if the area were to drop then the initial discount could even be eroded over time.
This is not unheard of though is more applicable to higher value central London properties rather than those at the bottom end of the market which these are.
Rain or shine these are more likely to hold their value than those on the higher end of the scale. We have also dug very deep into this location, and we are convinced this is perhaps going to be one of the strongest locations in London. Time will tell.
The structure of the deal is we will be ‘separating’ the residential and commercial units to take advantage of the cheaper rates for the resi component. We would look to do them all on five year fixed rates in order to insulate the deal from the expected future rate rises.
Changing the commercial to residential will help with the financing. Lenders are averse to lending to residentials above commercial units. Many point blank refuse, and some rely upon valuers comments, which by nature are subjective and whimsical.
Several months ago we had a case for a remortgage which was refused above a commercial by one valuer, much to the annoyance of the client; yet it was accepted by another valuer.
As this property isn’t exactly on High St Kensington, it would be better from this angle to have the whole block residential.
Under Class E, commercial units can be interchangeable, meaning they can switch within a wide band of uses without the need of planning approval. This could even mean the premises potentially could be an office by day and a café in the evenings.
This deal is priced competitively at £750K and is currently seeking a buyer. Do get in touch if it strikes a chord with you.
