Today we are hoping to exchange on a property in the crème of London, Mayfair. We were supposed to exchange on this property on Friday and were told if we did not we would lose it by Monday.
Over the weekend we managed to get a total of three different parties to purchase the property. Two wanted to keep the property long term the other syndicate were flexible. The property is in a purpose built block minutes away from Dorchester Hotel. It is on the fourth floor and consists of 1,400 sq. ft. It also comes with a share of freehold which is especially liked by foreigners, notably Indians who do not like the concept of leasehold. Leasehold means you don’t own the property forever, you ‘own’ it for a finite number of years, you have to pay more to extend the term you own the property for. This essentially means you don’t own the property, you ‘rent’ it albeit for a long period of time. This may be acceptable to the western psyche but for the Indian mind it’s difficult to digest, as the Indian mind looks at 21 future generations and the western typically only his own.
One of the parties who was looking to purchase the property on a buy and hold basis wanted to see the property. I told them it wasn’t possible, as we had been given an ultimatum to exchange. They said they couldn’t put this level of money in without seeing the property. I explained that it’s a purpose built flat and there’s little to see in a three bedroom flat even if you assume everything needs doing up it would only make a difference of say £150k. This is not the case, the property is in a lettable and therefore mortgagable condition. Though £3m is a lot of money, relative to what property you can buy in this location it is not a huge amount. However they were not convinced and so we moved to the other party who wanted to purchase this deal.
The price we had secured the contract for was £3.070m which equates to just under £2,200 per sq. ft. The flat directly below sold for over £3,000 per sq. ft. a few months back. The comparables for this block were a little scatty the reason being the block was composed of three separate units and the one we are buying in is the premier one due to the view over the gardens. Thus the differentials in price.
Given that prices of certain properties are touching £2,000 per sq. ft. to the north of Hyde Park it was a no brainer that in this location, a property at this price which comes with a share of freehold would be a good deal.
The problem with delaying this deal was the seller’s solicitor was very fast in responding to any enquiries we had. Despite this we managed to get our lawyer to find an enquiry to delay the exchange till Tuesday. Any longer and I fear we will lose the deal. There is another independent party looking to purchase the property for more than we are paying, the reason we know this for sure is they wanted to use our lawyers to put the offer forward. Therefore we know the threat is real, and not a ploy to get us to move faster.
We believe this property to be worth about £4.2m in the open market, which equates to £3,000 per sq. ft. We have managed to negotiate a three month completion which gives us the opportunity to flip the contract if we wish. However this is a rare property to get hold of and to sell it short would be a crime, therefore it would be better to hold on, complete the deal, tidy it up and then look for a sale when you can achieve the maximum price.
One of the investors is Muslim therefore his condition to investing in the deal was it should be purchased in cash, as to take a mortgage means the payment of interest which would be Haram. It may be Haram but not taking a mortgage limits the returns you make from a property. Islamic finance in my opinion is a sham. They circumvent the rules by changing the words, i.e. instead of calling it interest they call it rent, this is one way. The other is the bank purchases the property and then sells the property to the buyer for a higher price, which equates to all the interest rolled up and added to the purchase price. The payment for this is chopped up over the term of the ‘loan’, in essence it is a play on words, they still use the prevailing interest rates for the calculations. A rose by any other name is still a rose.
Ordinarily, the deposit required for the property would be in the region of 40% of the value, the rest of the money would be borrowed, therefore if we sell it for 40% more than we paid for it we have doubled our return. However by not taking a mortgage we will make only the 40%.
This does however mean we have no pressure and no paperwork. Furthermore as time goes on the property price should rise and at this point if we decide to take a mortgage we can refinance and pay the other investor out from the proceeds.
These days you need to hold the property for at least six months in order to refinance at the market price and not the purchase price.
However in this situation I suspect the ceiling on how much you can borrow will be governed by the rental on this property and not the market value. Property prices have been rising fast and the rental has not kept up therefore the yields have dropped. From when they used to be 5% not long ago they have dropped to 2-3%.
We are currently working on a couple of deals at the moment, one is a six flat scheme in Bushy valued at £1.1m and the other is a development scheme in the jewellery quarters of London, Hatton Garden.
