Prime central London Sloane Square investment opportunity for the savvy investor to extract additional value via a lease extension.
- Price: Currently marketed at a £725k guide price, this price level is a strong indicator that the property has a short lease given the Prime Central London location.
- Surprise, surprise; a few clicks later confirms that this property has 37 years remaining on its lease. So what price do you pay at purchase to hit the required investor return thresholds? This is critically a function of the a) lease extension cost, b) lease extension timing, and c) normalised property value (i.e. assuming a normal long lease is in place).
- From our calculations below, the target purchase price is £650k for this Sloane Square investment. You can go higher up to 700k to meet a minimum of 25% IRR in the leveraged case but it is not recommended to stray too high.
- Strategy: The strategy is clearly a lease extension followed by sale at full value. Though building work is not required, the proposed legal reconfiguration is not simple and should not be underestimated.
- The seller and estate agent will be more favourable to cash buyers given the short lease typically meaning that lenders are unwilling to provide mortgages. However, leverage ought to be used efficiently where possible. In this case, leverage can be obtained to include the lease extension cost and a strong case can be made to the selling parties with proof of funds for simply the equity portion and agreement in principle document for the debt.
- The lease extension should be targeted immediately. Thus, as part of a negotiation, we would recommend a conditional offer stating the need for the seller to serve a section 42 notice upon the freeholder to renew the lease. This will then permit you as the incoming buyer to complete the transaction with a new long lease on the property at greater than 100 years, thus avoiding the pitfall of acquiring a short lease property and having to wait the mandatory two year ownership period before being allowed to serve notice yourself.
- Why not a buy to let? Rental yields in this part of London are relatively poor compared to other parts of town, thus the refinancing extraction would be limited, thus meaning the notional equity in the property would be not most efficiently invested for a buy to let strategy when better rental opportunities exist (- I know you would rather have this red brick mansion flat versus a tired ex council property but for a sole buy to let strategy, cash is king!)
- The best option for this property is to extract the greatest value via a sale unless if you have the belief that prices are set to sky rocket in the future to justify a hold position until a future more optimal sale window. We do not believe the annual property price increase will be sufficiently strong enough to maintain a longer hold given other arbitrage opportunities exist in the market.
- Prime Central London (PCL) area: This is the location that most if not all would like to live in. The area benefits from world famous shopping streets, an array of high-end homes occupied by the ‘upper class’, excellent central London location in close proximity to Mayfair, good transport links towards east and further west London, short equidistant travel times to both Battersea Park and Hyde Park, good schooling, and more.
- Square footage: The square footage offered in this beautiful mansion period flat is actually habitable. Studios in this area can easily fall below the 400 square foot level with some marketed at even sub-200 square foot levels. This flat offers the required comfort for a rich bachelor or couple and, to note, meets the minimum gross internal area of 500 square foot for 1 bedroom flats across one floor, thus emphasizing that the space is decent.
- Strong demand: Demand for Prime Central London properties is both significant and resilient from both local owner occupiers and more often foreign investors (who displace the former by pricing up properties in bidding wars). Despite the recent cooling of foreign investor demand in PCL, we note that this is a temporary dip and prices will continue to increase as demand further increases over time. This Sloane Square investment property is a play on emerging markets growth and HNWI wealth generation.
- For a good recent guide to Chelsea, click here
- Property price decline: For the investment time horizon, prices may weaken slightly as global economic conditions are remain uncertain. We have conservatively factored in a lower sales price to account for this.
- Lease extension timing overrun: If the seller for whatever reason is unwilling to serve notice and you proceed with the purchase, then the lease extension could take longer than expected with a minimum ownership period of two years, which can result in up to 3 years to extend the lease and sell the property. Effort must be made to avoid this risk from the outset.
- Service charge: With an annual service charge at just over £3k, this is a noticeable cost but acceptable for this London area and standard of the building. Checks must be made to ensure a portion is contributed to a sinking fund and lease checks must be made to see when the next building work is set to take place.
Click here to see the detailed financial analysis for this Sloane Square investment target. We have shown both 100% equity and leverage cases. With regards to the former, we have provided analysis on two exit timings driven by the lease extension timing: a) lease extension immediate within 1 year, and b) lease extension after two years and sale within 3 years
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