Excellent New Cross investment freehold property presents multiple value-add options – a ‘good dilemma’.
- 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.
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.
- £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.
- Assumes a 25% equity level / 75% LTV to maintain low initial equity cost and access to a broader range of BTL mortgages.
- Resultant 2.75% interest rate associated with the BTL structure assumed, thus relatively low monthly mortgage interest costs (no repayment portion) of £561.
- 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).
- 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.
- 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.
- 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.
- New Cross investment under the specific scenario viewed yields an IRR of 47% and CoC return of 2.9x.
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