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