Target: Battersea Investment (SW8)


Strong Battersea investment freehold period property with potential to split into 3 flats – strong yields but not for the faint-hearted!


  • 122 Battersea investment pictures
    Spacious, unmodernised, freehold, period Battersea investment – a developer’s dream

    Price: This expansive Battersea investment freehold period property is currently marketed at a hefty £1mm, which currently at 1,394 square feet implies a £717 per square foot purchase price. We note that this pricing level is very fair versus comparables in the area and in terms of what is being achieved, particularly for properties ideally located in close proximity to the park and to the regeneration focus around the power station.

  • Given that the property is crying out for modernisation, we would kick off the negotiations at a fair £900k. This isn’t too aggressive and a deal could be potentially done at the £925k level (thus implying a nice £664 per square foot), which has been used as per our analysis. Given the proposed strategy and expected returns, we could go higher and reach the asking price to still yield strong project returns.

  • 122 Battersea investment map
    Located close to the reputable Battersea park and near the proposed development and tube extension

    Strategy: The property is located in Battersea or ‘South Chelsea’, which LPA has written about (click here to see a detailed article on a previous highlighted Battersea investment and area overview) and we note that Battersea has exceptional property price forecasts and arguably the strongest potential in London at present. This is due to the eagerly anticipated Battersea Power Plant development, overall regeneration in close surroundings and Northern Line extension; the latter has received the go ahead (click here) and will further improve transport links to this highly attractive area.

  • Given the overall space spread across three floors available to play with, this Battersea investment has significant development potential (shown below). We would employ a development strategy followed by either 1) an immediate sale, or 2) refinancing with subsequent sale. The latter is relatively more appealing given that the refinancing will provide the opportunity to extract initial injected equity in a one year time frame and also permit realising general property price appreciate growth in the area as we near completion from the tube extension and overall regeneration.
  • In the proposed development, we have split the property into three equally sized flats having extended the first and second floors over the existing area at the back of the ground floor. The square footage is expected to increase overall to 2,350 square feet as a result and excludes the proposed balconies square footage. The overall work is expected to take between 3-6 months depending on speed of approvals received from Wandsworth council, the haste of the builders utilised in terms of external building, internal reonfigurations plus installations of new bathrooms and kitchens.
    Battersea freehold property split into 3 equallty sized flats
    Battersea freehold property split into 3 equallty sized flats – not as easy as (flats) a, b, c… but certainly achievable

     

    Financial Analysis:

    122 Battersea investment financial analysis
    Development, refinancing, then sale scenario shown


    • A £925k acquisition price assumed. Note, the resultant returns justify an increased acquisition price; at the asking £1mm (OTBE), project IRR and CoC returns remain strong at 72% and 3.2x respectively.
    • We have assumed a relatively safe structure from the perspective of bank lenders with a 25% equity level / 75% LTV to also maintain healthy gearing and access to the broader range of BTL mortgages with good cost of debt levels.
    • We have forecast £120k in development costs as a whole to cover council approvals, artchitect plans, building works and legal costs in assigning three new leases and submitting three new flats with the registry.
    • Post development, a subsequent refinancing is undertaken (application past the six month period) for each flat with a similar BTL structure as executed initially for the entire property. Note that the valuations for each flat are not the same as the expected sales price in the open market given lenders are typically conservative (If sold normally now, we would expect to generate £575-600k per flat). The refinancing extraction is assumed to at least cover all initial equity injected into the project, particularly for purchasing and development costs. There is a resultant healthy £700 per month per property being yielded.
    • Assuming a sale scenario in 3 years when the property prices are expected to escalate further in the area, we assume that each property is sold conservatively for £675k implying c.£925 per square foot at that time. Overall project returns are expected to be 87% IRR and 3.5x CoC return. The price could very well surpass the £1000 per square foot mark by that time as Battersea begins to amalgamate with Prime Central London areas.

     


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Target: New Cross Investment (SE14)


Excellent New Cross investment freehold property presents multiple value-add options – a ‘good dilemma’.


new cross investment 2
Attractive freehold period property
  • Price: This New Cross investment freehold period property is currently marketed at £350k, which we note has come down by £25k in less than 2 weeks after first marketing. Is this premature price reduction due to poor early feedback or a lack of viewings? Potentially. In any case, we must praise the seller for this overt display of eagerness to sell!
  • We would advise kicking off the negotiations at £300k and pushing hard to achieve around the £320k. At 582 square feet (which is simply adequate space), this implies a price of £550 per square foot. This is a fair price level. A good transaction would be around £510-£520 per square foot. However, we have conservatively forecast £325k in our analysis in order to obtain this asset given the anticipated pricing tension created by the aforementioned reduction.

  • SE London growth pocket
    SE London growth pocket

    Strategy: The property is located in a South East London growth pocket (see here) with increasing demand from both the young and creative professionals, close to and connected via the Overground train line to Peckham, Brockley and Forest Hill. It is a period property, which is always a boon and is a resilient and attractive asset type versus ex council and new build property types. It has an existing floor plan that promotes strong BTL cash flows. Last but not least, the freehold aspect provides freedom to the buyer in terms of development.

  • Overall, the property is attractive and we have compiled the below analysis to showcase a more complex value-driving strategy of development followed by BTL HMO rental. (Please note that this is not the only option left to the buyer).
  • We have shown an extension into the demised garden space to create two new bedrooms off the existing reception to drive the prospective rental. Subsequently, the property could be let as a whole or on a more active room by room basis as a HMO to drive the rental cash flows upwards even more.
  • As part of the planned capital expenditure, there are even options to create a balcony on top of the new extension into the garden to be accessible on the 1st floor, or even build another identical level on top to net an additional bedroom (given access may be required by a second communal area like the ground floor). In the latter larger extensions, consideration could even be given to splitting the property into two flats to reap greater rewards for your effort.
    New Cross investment
    Ground floor extension to create two new bedrooms

     

  • Financial Analysis:

    new cross investment 4
    New Cross investment projected assuming extension development followed by interim HMO active rental until sale in 3 years
    1. £325k acquisition price assumed. Note, the resultant returns justify an increased acquisition price even at the marketed price level should competitive pressures prevail; at £350k (OTBE), project IRR and CoC returns remain strong at 40% and 2.5x respectively.
    2. Assumes a 25% equity level / 75% LTV to maintain low initial equity cost and access to a broader range of BTL mortgages.
    3. Resultant 2.75% interest rate associated with the BTL structure assumed, thus relatively low monthly mortgage interest costs (no repayment portion) of £561.
    4. Conservative £20k assumed for development costs associated with the ground floor extension, approvals and any minor refurbishment costs. If viewed conservatively as total expansionary capes, then estimated spend of £133 per square foot created (from the existing 582 square feet to 732 square feet).
    5. Assumed a HMO scenario for BTL. With a  resultant 4 bedrooms created, assume £145 per week rental per room (it could very well be more) to include all bills.
    6. Strong net pre-tax cash flow assumed at c.£1.8k per month and levered cash flow yield of 19.5% surpassing the market yield of 9.3%. The cash flow is net of all costs that are covered in order to maintain HMO and inclusive of bills.
    7. Assumed sale scenario in 3 years when the property price is expected to escalate to £500k. Do note that you could even try a refinancing and maintain the strong cash flows for longer.
    8. New Cross investment under the specific scenario viewed yields an IRR of 47% and CoC return of 2.9x.

     


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Target: Peckham Investment (SE15)


Strong Peckham investment period property asset for a combined BTL and speculative strategy.


  • peckham investment
    3 bedroom period property Peckham investment

    Price: This period property Peckham investment is currently being marketed at a fair £350k, which stands out versus comparable properties available in near vicinity given the style of property, number of bedrooms available and proximity to transport links, all of which in turn drives the associated rental potential (assumed at the £450pw level in our analysis).

  • We anticipate competition for this property given the aforementioned positive factors and would bid strongly but not exceed the £375k level in order to leave room for equity extraction upside in the short to medium term at a comfortable lender valuation (according to internal credit thresholds) of c. £450k in a 2 year time frame, to preserve yields.
  • Should tenants be in situ as part of the acquisition, this will aid to narrow the potential market of buyers to only BTL investors given primary residential mortgage purchasers will struggle to get this aspect past lenders.

  • Strategy: The property’s current 3-bedroom status is excellent and prospective tenants in situ promotes a ‘laissez faire’ strategy. Given both the rental strength in the area (from both creative types and younger professionals forced out of more central locations) and strong area prospects (overall regeneration), we would attack with a combined BTL and speculation strategy for best effect. Any capital expenditure is forecast to be purely for maintenance purposes to ensure the basic responsibilities are being met in order to keep the property rented out – it is not time to become an interior designer until the end of the investment life to promote a stronger sales price.

  • We would seek to generate strong net rental cash flows on an ongoing basis. We would also refinance at the 2 year mark to extract equity after which the option is to continuously maintain at efficient LTVs by refinancing or seek to sell once the price inflates to a sufficient level. For the purposes of our analysis of this Peckham investment to meet our targeted investment returns, we would seek to sell after 4 years once the price has safely reached £450k. We would emphasise that this is our downside case given we estimate the price to be £500k after 4 years.

  • peckham investment 2Area: Peckham is one of the trendiest up and coming areas of London that is gentrifying with an abundance.
  • Distant seem the days of Nelson Mandela House residing Del Boy and Rodney. Instead, Victorian period property is up for grabs and competitively fought over. There has been a regeneration programme around Bellenden Road and surrounding streets. Cafes, shops, bars, restaurants have sprouted as well as a theatre too. We view this as the beginnings of another Shoreditch story.
  • Developers have already started coming into the area and even early signs of city banker money is coming in. Travel was previously weak with just the rail options but the introduction of the overground line recently (the ‘ginger’ line) has improved links substantially for South East London.
  • Property north of Peckham High Street is cheaper than around Bellenden Road and the Holly Grove conservation area. We also note, Peckham also benefits from outside space in the form of Peckham Rye Park and Common and Burgess Park, both of which have been restored recently.

  • peckham investment 3Financial Analysis:

    1. £350k acquisition price assumed. Note, the resultant returns justify an increased acquisition price should competitive pressures prevail; at £375k (OTBE), project IRR and CoC returns remain strong at 23% and 1.9x respectively.
    2. Assumes a 25% equity level / 75% LTV to maintain low initial equity cost and access to a broader range of BTL mortgages.
    3. Resultant 2.75% interest rate associated with the BTL structure assumed, thus relatively low monthly mortgage interest costs (no repayment portion) of £605.
    4. Conservative £3k for any maintenance capital expenditure and assumed upfront in order to rent property (if existing tenants are not in situ as part of purchase)
    5. £450 per week rental assumed for 3 bedroom properties in the area. This is a conservative estimate given period properties in Peckham can achieve more.
    6. Strong net cash flow assumed in excess of £1k per month and levered cash flow yield of 12.8% surpassing the market yield of 6.7%.
    7. £425k safely assumed as the lender refinancing valuation. We would target £450k in the 2 year period.
    8. Same interest rate and mortgage structure assumed as at the initial purchase stage.
    9. Strong net cash flow maintained in excess of £1k per month and yields maintained as at inception.
    10. Refinancing extraction of £56.5k, thus leaving less than half of the original equity injection that will serve to boost returns.
    11. Assuming a 4 year hold period and sale at £450k, though we would estimate £500k at this point for this asset.
    12. Peckham investment project IRR of 32% and CoC return of 2.3x.

     


Click here for a link to this property


London Property Analyst provides Expert Consulting Services

Contact manager@londonpropertyanalyst.co.uk to see how LPA’s bespoke property consulting services can help you achieve successful acquisitions in the highly competitive and lucrative London property market