Strong Peckham investment period property asset for a combined BTL and speculative strategy.
Price: This period property Peckham investment is currently being marketed at a fair £350k, which stands out versus comparable properties available in near vicinity given the style of property, number of bedrooms available and proximity to transport links, all of which in turn drives the associated rental potential (assumed at the £450pw level in our analysis).
- We anticipate competition for this property given the aforementioned positive factors and would bid strongly but not exceed the £375k level in order to leave room for equity extraction upside in the short to medium term at a comfortable lender valuation (according to internal credit thresholds) of c. £450k in a 2 year time frame, to preserve yields.
- Should tenants be in situ as part of the acquisition, this will aid to narrow the potential market of buyers to only BTL investors given primary residential mortgage purchasers will struggle to get this aspect past lenders.
Strategy: The property’s current 3-bedroom status is excellent and prospective tenants in situ promotes a ‘laissez faire’ strategy. Given both the rental strength in the area (from both creative types and younger professionals forced out of more central locations) and strong area prospects (overall regeneration), we would attack with a combined BTL and speculation strategy for best effect. Any capital expenditure is forecast to be purely for maintenance purposes to ensure the basic responsibilities are being met in order to keep the property rented out – it is not time to become an interior designer until the end of the investment life to promote a stronger sales price.
- We would seek to generate strong net rental cash flows on an ongoing basis. We would also refinance at the 2 year mark to extract equity after which the option is to continuously maintain at efficient LTVs by refinancing or seek to sell once the price inflates to a sufficient level. For the purposes of our analysis of this Peckham investment to meet our targeted investment returns, we would seek to sell after 4 years once the price has safely reached £450k. We would emphasise that this is our downside case given we estimate the price to be £500k after 4 years.
- Area: Peckham is one of the trendiest up and coming areas of London that is gentrifying with an abundance.
- Distant seem the days of Nelson Mandela House residing Del Boy and Rodney. Instead, Victorian period property is up for grabs and competitively fought over. There has been a regeneration programme around Bellenden Road and surrounding streets. Cafes, shops, bars, restaurants have sprouted as well as a theatre too. We view this as the beginnings of another Shoreditch story.
- Developers have already started coming into the area and even early signs of city banker money is coming in. Travel was previously weak with just the rail options but the introduction of the overground line recently (the ‘ginger’ line) has improved links substantially for South East London.
- Property north of Peckham High Street is cheaper than around Bellenden Road and the Holly Grove conservation area. We also note, Peckham also benefits from outside space in the form of Peckham Rye Park and Common and Burgess Park, both of which have been restored recently.
- £350k acquisition price assumed. Note, the resultant returns justify an increased acquisition price should competitive pressures prevail; at £375k (OTBE), project IRR and CoC returns remain strong at 23% and 1.9x 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 £605.
- Conservative £3k for any maintenance capital expenditure and assumed upfront in order to rent property (if existing tenants are not in situ as part of purchase)
- £450 per week rental assumed for 3 bedroom properties in the area. This is a conservative estimate given period properties in Peckham can achieve more.
- Strong net cash flow assumed in excess of £1k per month and levered cash flow yield of 12.8% surpassing the market yield of 6.7%.
- £425k safely assumed as the lender refinancing valuation. We would target £450k in the 2 year period.
- Same interest rate and mortgage structure assumed as at the initial purchase stage.
- Strong net cash flow maintained in excess of £1k per month and yields maintained as at inception.
- Refinancing extraction of £56.5k, thus leaving less than half of the original equity injection that will serve to boost returns.
- Assuming a 4 year hold period and sale at £450k, though we would estimate £500k at this point for this asset.
- Peckham investment project IRR of 32% and CoC return of 2.3x.
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