Target: Aldgate Investment (E1)


Superb Aldgate investment presents excellent BTL cash flow yielding asset


Property Price and Valuation:

Aldgate Investment
Yet again, another ex council gem
  • The current 3-bedroom ex-council home is currently being marketed at a guide price of £370k. Given the good square footage on offer at 760 sq ft, the implied asking price is yielding a £487 per square foot investment. The pricing is attractive given the current state of the London housing market and particularly Aldgate’s improving credentials (in the form of the Whitechapel Crossrail central station transportation project, luxury residential development projects, hospital and general area makeover driving gentrification – click here for a decent overview). Typical properties in the area are currently ranging from £500-£800 per ex-council square foot (and £750-1000 per period property square foot).
  • BTL investors are typically drawn to ex council heavens and given the competitive pricing for this ex council property versus other similar style / size / number of bedroom properties, we expect strong competition for this asset. The pricing leaves the potential buyer plenty of room to exploit good monthly cash flows if structured well.
  • Good investors will still attack at £350k or less to register a good discount (which will have little impact on the debt monthly interest costs but be an attempt at greater equity upside going forward in a refinancing or sale). However, as can be seen from the financial analysis below, there is room for a price increase if required to annihilate the competition and generate strong cash flow yields (as well as a healthy reported yield shown but we prefer a leveraged yield metric).

Property Investing Strategy:

Aldgate Investment
The Aldgate triangle – a growth hotspot with plenty of room to grow
  • Given the impending election throwing temporary doubt over the property market, we would attempt to get the price agreed and kick off the conveyancing process immediately. Depending on the outcome of the general election (which you can see the latest on here), should the incumbent Tories retain power, prices are generally expected to be upheld or increase further. At this point, if you have the purchase price agreed, we suggest you complete without haste before the seller thinks twice about trying to achieve a higher offer. However, should Labour win, we anticipate a temporary weakening of house prices as has been historically evident. If the latter wins, there is certainly no harm in throwing in a price reduction to complete after the election.
  • The primary strategy for this Aldgate investment is clearly buy to let given that the asset is an excellent cash flow yielder. It is simpler than the other property targets highlighted by London Property Analyst, thus making this an excellent candidate for a novice investor,
  • We would also greedily try and strain as much as possible from this property by putting up a partition wall, which conservatively ought to take a contractor no longer than a few days, followed by immediate rental. Do note that the erection of the wall will not constitute an official 4th bedroom given the lack of reception room window as well as minimum GIA standards, which can potentially be compensated by providing comfy sofas / a dining table to make the flat more homely and acceptable). The wall is for purely rental hiking purposes. Rental comparables dictate that a £500 per week rental price is certainly feasible post conversion to a 4 bedroom flat, which is a solid price for you as well as for the individual renters at £125 per person per week.
Aldgate Investment
A cheeky conversion to a 4-bedroom property – does not hike the equity but positively impacts rental
  • The 3-to-4 bedroom conversion (illustrated above) will increase the rental potential. Although we note that such a move typically has a relatively lower impact on rent versus 1-2 bedroom and 2-3 bedroom conversions, the current market rental strength and market dynamics will yield a more generous increase. Those renting out ex councils are typically doing so in the area to be more financially prudent and are young professionals (typically with sub £25k salaries in the capital). Given youngsters are wishing to share rental burdens at this time when London rental prices are relatively high and increasing, there will be groups of 4 who will snap this property up.
  • In the medium to long term, we would preferably refinance to extract any equity gains and still enjoy the solid net rental cash flow. We would aim to keep this asset efficient by refinancing on a regular 2-year cycle and hold this asset going forward as a good pension asset. Thus, we have not shown a sale scenario for this property in a simplified financial analysis.

Financial Analysis:

  1. £370k has been assumed as the winning bid given the expected competition for this Aldgate investment.
  2. 75% LTV assumed a healthy leverage ratio in order to benefit from the current sweet spot in mortgage interest rates. We have conservativley assumed an associated c.2.5% debt interest cost (though more competitive rates, potentially at the c.2% level can be achieved). Note, 85% LTVs do exist for BTLs at present and this deal can be structured using minimal equity given the strength of net rental cash flows.
  3. Resultant cash requirement is just north of the £100k mark including cheap development costs at £1k for the partition wall to drive the rental further.
  4. £500 per week has been assumed as the rental. We expect young professionals to snap this up with a cheap £125 per person per week.
  5. Given the deal structuring assumptions, the net rental cash flow is a strong £1.2k a month or 14.5% levered cash flow yield.
  6. We have assumed a refinancing in 2 years at £450k, which is a conservative estimate given other comparable properties in the market today. This refinancing process will extract £59k (57% of the initial cash injection) leaving a residual £44k from the initial investment. We we anticipate any remaining funds can be taken out via subsequent refinancing processes on a biannual basis). No sale is assumed given the assertion that this asset serves as a good pension asset going forward and we recommend a hold.
Aldgate investment
A strong pension asset investment conservatively expected to generate a net £15k+ p.a. going forward

 


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