Target: Elephant & Castle Investment (SE11)

Elephant & Castle investment opportunity for a shrewd investor to create additional value via a flat split.

  • Elephant & Castle InvestmentPrice: Currently marketed at £800k, which seems relatively expensive at first for a 3-bedroom property in this area BUT this is not the case. This Elephant & Castle investment is quite simply an excellent property screaming to be split up into two flats! So much so, the agent is explicitly begging you to do this. This property is forecast to sell for around the marketed price of £800k (implying a cheap £562 per square foot price) given both 1) the strength of the property-split potential, and 2) the overall Elephant & Castle area appeal as a strong regeneration prospect in London. We believe a savvy cash rich investor or astute investor (employing other leveraged means of financing) will seek to snap this up, complete the legal rejigging into two separate demises and generate intrinsic property value quickly. So what exactly is the drawback? See investment risks section below.
  • Strategy: The strategy is a combination of development and legal reconfiguration followed by either 1) a BTL refinancing of both properties to extract value, or 2) sale of one or both subsequent properties. The value creation from splitting into a 1 bedroom flat and 3 bedroom flat is calculated to be over £300k.

Investment Highlights:

  • Excellent square footage size within desired period property. At 1,423 of period property and a purchase at c.£800k, the implied £562 per square foot for this period property drives the conclusion that this property is cheap, particularly given current market conditions. Even if the price was inflated by the pressure from competing bidders to £900,000, an implied square footage price of £630 is still completely acceptable when accounting for the project work envisaged for this Elephant & Castle investment. The flat size permits a relatively easy split subject to formal approvals to be obtained from the council (which is generally amenable in this part of town to the creation of additional housing and ought to be favourable, particularly in this case) and legal title adjusted to two new leases to be formally recorded at the land registry.
  • Development ease: It is a relatively simply case of 1) acquiring the property and proceeding with the formal council approvals to split the flat, 2) employing a builder to refurbish the flat(s) and install new electric meters / boilers where required, and 3) deploying a solicitor to conduct the legal legwork to register new title deeds at the land registry. Do note that as part of the proposed plan, the flat’s original corridor will return to the communal freehold for the building given this is required for access to both new flats.Elephant & Castle Investment
  • Deal structuring optionality: There are two methods to go about the deal structuring for this Elephant & Castle investment. The first approach entails a full cash purchase given the agent’s stated requirement for a cash buyer – this is derived from the fact that a typical lender will have issues mortgaging a property that is seemingly split into two flats, with two kitchens. However, we note that this is a more restrictive deal structure, obliterating many buyers who simply do not hold such large investment funds. There are options to reduce the cash injection to more feasible levels for more investors to participate, which Londonpropertyanalyst advocates to be also the smarter second approach to drive the overall project returns. This second method, if explained to the agent will serve to provide comfort to both agent and selling parties in being able to execute – a simple AIP ought to be sufficient for proof of funds.
  • Elephant & Castle InvestmentStrong development area prospects: Elephant & Castle – another battered and beleaguered part of South London? This part of town is no longer being ignored. The area continues to undergo a large scale regeneration phase. Prices have been shooting upwards over recent times and are expected to grow further substantially. We note future growth in the area as it joins the ranks of its more lucrative neighbours; London Bridge, Borough and Southwark. Pockets of growth on the south side of the river in war torn parts of London are appearing and rightly so for Elephant & Castle with its central location and Zone 1 label. Developers have entered the fray with ongoing new builds coming online, such as The Elephant and new homes expected over demolished eyesores such as the Heygate Estate; Lend Lease has gained full planning for the second phase of its £1.5Bn regeneration with plans to build nearly 600 homes, read here. This new £1.5Bn masterplan to create new homes, two new conservation areas, a market square and the biggest public park to be created by London for 70 years, is all targeted for completion by 2020. Transport links are excellent with access to the Northern line and Bakerloo line, which should certainly appeal to young professionals (both new buyers and a solid rental market related to this property target). Gentrification in this seemingly rough, neglected neighbourhood is abound. Londonpropertyanalyst states to clearly watch this space over the coming 5 years.
  • For a decent guide to Elephant & Castle’s regeneration plans, click here.

Investment Risks:

  • Development risk: There is always the risk of declined plans to split into two flats. This posed risk to the proposed Elephant & Castle investment is expected to be a worst case scenario. Given the Council’s expected cooperation with such a plan and previous planning decisions (albeit controversial) in favour of development and home creation, we assert the probability to be less than 10%. Declined plans are more likely to be in the case of trying to plan differently to what has been outlined above, which will simply extend the timeline of the project as you revert back to the proposed vanilla split.
  • Regeneration risk: The area regeneration plans are in place and are progressing, albeit too slowly for this investor! Without entering the moral debate, the question is how quickly will gentrification take place? The quicker it is, the stronger the overall price increase will be. We note that a small proportion of new homes have been allocated for affordable housing, which ought to provide comfort for more homes being bought privately.

Financial analysis: Click here to see the full financial analysis for this Elephant & Castle investment. We have shown the 100% equity case and also shown the more lucrative leverage case separately to distinguish the differences between the two deal structuring cases

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