Sow & Reap Properties

25/12/2023

10/11/2023

Happy Diwali!

06/10/2023

In recent times there have been a lot of commercial properties which have been disposed of both in the auctions and private treaty. The primary cause being that retailers are moving away from the costs, and wastage of a street presence to an online presence. Only very strategic and prominent sites are being retained.

Prepping no doubt for what’s coming; which is a complete eradication of cash and a digital currency. Soon, you’ll be paying for a cup of coffee with a chip in your hand!

Many of these include Barclays, HSBC and William Hill to name a few. The majority of these have gone in auction and achieved good prices, due in part to the permitted conversion rights available. Though with most of the prominent sites it would be worth retaining as commercial, primarily due to the hassle free FRI rent received, which when netted down may end up being higher than the residential rentals; this is also compounded by the sharp increase in build costs.

Also, many of these were owned by typically offshore based property companies, in the Isle of man, or Jersey for example. They purchased these investments based on both the blue chip tenant and the hassle free nature of the tenancy. When this is looking to come to an end, it no longer is fit for purpose, so they look to offload.

Not having a local presence or being in the development game, it will soon become a liability for them if they do not offload. An empty commercial property attracts business rates, enhanced insurance, not to mention the threat of illegal occupation. Therefore the asset passes hands, and what can become a liability for one investor can become a gold mine for another.

Similarly, we have sourced an opportunity which is off market, which is of a similar profile. A prominent commercial tenant has a lease on the ground floor, though is not actually in occupation, and is tied in till sometime next year. The upstairs has already been converted into flats, and is producing an income, although it seems well below market levels given the recent spikes in rents.

This is a good opportunity, one which is off the radar of the masses, therefore allowing for a discrete private sale.

The rents can potentially be increased by 25%, with the downstairs, either in our opinion, segregated into smaller commercial units so they are easier to rent or a partial residential conversion.

There are a variety of angles in regards to this deal which need to be explored further.

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Suresh Vagjiani

29/09/2023

Rates are starting to drop, and there are products that have appeared which are actually below 5%, that too for BTL properties. Only the other day we quoted for a client regarding a remortgage on a 5-year fixed.

This drop is starting to make BTL investment justifiable again. Though, I do think property owners have been spoilt, since Feb 2009 until March 2022 we have had a rate of 1% or below. It becomes normalised, people’s lifestyles and expenditure increases in line with the surplus income. They don’t see what’s around the corner and tend to live for the moment.

I had a client who was on a base rate tracker, 0.39% below base, when the rate dropped to 0.1%, technically the bank should pay him; however, there was a clause in the contract specifying a nominal payment.

Given the base rate is currently 5.25%, it seems the anticipation is that there will be further rate reductions as the five year rates are below this level. Only time will tell.

Rental cover, which is the multiple of rent over the monthly mortgage payment, never used to be an issue; typically it needs to be 125% or 145% of the monthly payment. It never was an issue but all of a sudden it governs the amount one can borrow, the actual value of the property being a secondary consideration. This criteria, which puts a ceiling on the amount one can borrow, has become the governing factor. There are some lenders who have evolved to allow for something known as top slicing whereby when the rent is not sufficient, they use the borrower’s surplus income as a top up to get to the amount required.

Some readers may recall in Oct 1989 the base rate went all the way up to 14.88%, nearly triple of the current rates. The reason for this hike was partly to control house prices which rose steeply by 79% from 1982 to 1989. This hike had the effect of dropping prices, as expected, to a level where the income to house price ratio was three times.

Back then the average house price was £56,615 and the average wage was £11,327, a multiple of 5 times. Currently, the average house price is £287,546 and the average income is £33,402, a multiple of 8.6 times.

To compound this, I suspect you could actually buy a house for £56K in 1989. The current average figure given for a property will most likely only buy you a flat. This would serve to increase the multiple to even higher levels.

The difference between the two periods is, more people trust and have faith in UK property. They also accept if there is a storm it is a temporary one, and when it clears this asset class will bounce back.

Investors have become more focused on finding property deals. Investments presented now by the big agents tend to be around 8-10% yield, accommodating the recent rate hikes.

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Suresh Vagjiani

22/09/2023

I recently met a client who has hopes of purchasing a property, not just in the prime area of London, but the prime street. She knows the location well, as she currently rents in the same building as where she wants to purchase. There is no need to sell her the location or the flat, she’s already converted – with good reason. The property is in a premier location, in a block which has 24 hours porterage, and pin drop silence, in a close ended road.

The challenge she was having regarding obtaining a mortgage was one of income proof. Though earning a large income, partially due to personal income and partially due to family wealth, it wasn’t high enough to get her to the level she needed to get anywhere near the purchase price.

It seems this issue is not just an issue for the ordinary class of folks. Luckily for her, if required the family who are based overseas can provide backing if need be. The property would be purchased in the sole name of the client however the mortgage would be in the guarantor’s name as well as the client’s.

This is a relatively new concept in residential lending. The founder of the first bank to do this, as often is the case, noticed the gap in the market through his own trials and tribulations in buying his first home.

The average couple with an average income in London which is currently £37K would struggle to purchase a house.

Many of their parents have paid off their mortgages and are in a relatively strong position to provide a helping hand. This could be in the form of helping to increase the deposit or helping to boost their income levels. All lenders will want to know is where the deposit has come from, and if it is from other family members it will need to be provided on the basis it is a gift. This might be an awkward conversation depending on the circumstances.

Since this lender has broken the mould, many other lenders have entered this new space. Which, in essence, means the weight of purchasing a property is not simply on the shoulders of the individual buying it, but spread across the family members willing to help. This is of particular help to close nit families, notably Asians and Jewish.

The ratio of income to house prices has widened. In 1983 the average earning was £8,528, the average house price was £26,000, which comes to about three times the income. Currently, it stands at about nine times the income level. Hence the need for more innovative mortgage solutions.

As time goes on I expect more innovative solutions to come up within this space. Perhaps a hybrid of equity release from the parent’s home. This is a solution were the borrowers pays no monthly instalments, and repayment is only due on death and this is used to fund the new purchase, for the children. This could have benefits on the inheritance tax side as well.

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Suresh Vagjiani

15/09/2023

Back in the day during the pre credit crunch era, one could (if done in the right manner) purchase a property with no money down; using the discount as the deposit.

The way this would work is instead of a mortgage offer for a purchase you would apply for a remortgage at the market level, not the purchase price. For example, if you were buying a property for £70K and it was worth £100K, you would apply for a remortgage at 85% on the £100K. Assuming the valuation was confirmed by the surveyor, you would get a mortgage offer at £85K. With this you can get a day bridge, which is a bridge for one day. The lawyer would undertake the bridge will be paid back from the mortgage proceeds within 24 hrs. This would normally cost 1%. They would lend £70K, the full purchase price for the property. And you then get the surplus £15K back to you, minus expenses of course.

I guess the above was partially why credit was ‘crunched’; well, at least it wasn’t squashed into oblivion.

One cannot do the above in this environment. The same structure can be followed but not in the same time span. You can potentially do this, but stretched over a six month period.

The day one remortgage, which was what it was known as doesn’t exist anymore, not at the market value, but it is possible to remortgage within six months at the purchase price.

If you wish to extract the full market value, you would need to wait six months.

We have a case currently which was purchased at 30% below market value. Due to it being an auction purchase, and other issues, it was purchased on a bridging loan. The client is now understandably anxious to come out of the bridge. Several lenders have been approached to remortgage within the six month period. Due to the client’s profile of being highly geared, a couple of lenders said yes initially and then withdrew.

One lender however is on track to issue the offer which is expected to come out shortly. This will be at the lower amount, the purchase price. Due to the length of time this process has taken, the client is nearly over the 6 month timeline. Therefore, when the mentioned offer comes through, we may not necessarily pull down upon it. It might be worth waiting a couple of months in order to remortgage at the higher value, and thereby not leave too much cash in the deal.

Contrasting the two scenarios, the only thing which has changed is the time period. One can still remortgage at the higher amount but the time has to be stretched to six months. This of course has a cost, about 8-10%. This, however, has the net effect of reducing how much cash is left in the deal. Instead of about a third, it will be around 10%, which is still a good position to be in.

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Suresh Vagjiani

11/09/2023

We had an enquiry where the client required a remortgage on a large property in Central London, worth about £4.2M. Needless to say this is not a rental yield play. Rents tend to be abysmal in proportion to the property value in this area. It’s capital growth which is the aim when buying these types of assets.

The issue with prime London property is that you need to have the staying finances to remain in the deal, for example to weather the service charges which tend to be high; and currently you have a scenario with rising interest rates. And entering the market at the right time is crucial. If these are aligned it can be a very fruitful investment. If not, it will burn a hole.

The client wanted 70% of the value of the property. With BTL properties the lender has a criterion whereby the rental must be 125% or 145% of the monthly mortgage amount, normally dependent on whether the property is held in a personal name or a Ltd company. When imposing this criterion in prime London it puts a low ceiling on the amount one can borrow. This ceiling then becomes the over ridding factor, irrespective of how much the property is worth.

As rates have risen the ceiling has dropped lower and lower.

Some lenders have alternate angles to addressing this issue. One is called top slicing, whereby the individual’s personal income is taken into account, and if there is a large enough surplus, this is then used to bump up the rental income to justify a higher borrowing. Another example is where the product interest rate is reduced but then the arrangement fee is loaded up, some go as high as 7%.

Looking at the case from a lender’s perspective, if the property were to be repossessed the lender would recover their funds, therefore they tend not to lend above 70% especially on high value properties, which is really the bottom line and the hard reality.

In this specific scenario, the client has a successful agency business, but the profits are not withdrawn from the company. They sit in there accumulating.

The excess funds were to be used for property investment, therefore the excess money raised would be working hard for the client in the background – presumably. Given the above challenges we managed to source a lender who has the capacity to go to this level of lending and right up to 70% LTV. This taps into the equity the property has, and allows the client to be in a cash rich position, ready to exploit the current market, where the deal flow is increasing steadily.

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Suresh Vagjiani

08/09/2023

We had an enquiry where the client required a remortgage on a large property in Central London, worth about £4.2M. Needless to say this is not a rental yield play. Rents tend to be abysmal in proportion to the property value in this area. It’s capital growth which is the aim when buying these types of assets.

The issue with prime London property is that you need to have the staying finances to remain in the deal, for example to weather the service charges which tend to be high; and currently you have a scenario with rising interest rates. And entering the market at the right time is crucial. If these are aligned it can be a very fruitful investment. If not, it will burn a hole.

The client wanted 70% of the value of the property. With BTL properties the lender has a criterion whereby the rental must be 125% or 145% of the monthly mortgage amount, normally dependent on whether the property is held in a personal name or a Ltd company. When imposing this criterion in prime London it puts a low ceiling on the amount one can borrow. This ceiling then becomes the over ridding factor, irrespective of how much the property is worth.

As rates have risen the ceiling has dropped lower and lower.

Some lenders have alternate angles to addressing this issue. One is called top slicing, whereby the individual’s personal income is taken into account, and if there is a large enough surplus, this is then used to bump up the rental income to justify a higher borrowing. Another example is where the product interest rate is reduced but then the arrangement fee is loaded up, some go as high as 7%.

Looking at the case from a lender’s perspective, if the property were to be repossessed the lender would recover their funds, therefore they tend not to lend above 70% especially on high value properties, which is really the bottom line and the hard reality.

In this specific scenario, the client has a successful agency business, but the profits are not withdrawn from the company. They sit in there accumulating.

The excess funds were to be used for property investment, therefore the excess money raised would be working hard for the client in the background – presumably. Given the above challenges we managed to source a lender who has the capacity to go to this level of lending and right up to 70% LTV. This taps into the equity the property has, and allows the client to be in a cash rich position, ready to exploit the current market, where the deal flow is increasing steadily.

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Suresh Vagjiani

05/09/2023

building where the values have been decimated by the lack of management of the freehold block. Every so often they request service charge from all the leaseholders. Presumably, the overseas landlords pay, our client hasn’t paid for over a decade, as they cannot answer the same questions asked every time they make a demand on the service charges.

So, the summary is don’t let the tail wag the dog. The objective is to earn the maximum return on your investment, not to buy a freehold. However, this doesn’t mean you should go in blind. The management pack when purchasing should be looked into carefully, both the service charge, and the ground rent.

This aspect of investing must of course be considered, but this should not be the decisive factor.

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Suresh Vagjiani

26/08/2023

It is said the bank base rate will rise to a peak of 5.75% and then start to decrease. Maybe, maybe not. I’m doubtful if any of these experts know what the game plan is. There is the news on the mainstream media, and then there’s what is actually going on.

The case for purchasing property is a compelling one, it’s a real asset, which tends to rise given a long enough timeline. It also produces a stable monthly income.

I used to think buying property without getting funding was inefficient, as you can purchase three for example, with the help of funding. And there’s the acronym OPM banded about, meaning Other People’s Money, using the banks money to make money.

While there was a case for this in the past, I think there is a strong case for not taking any borrowing and purchasing deals in cash. This obviously means you’ll be able to do less, but more safely.

Over the years, we have had a few deals go sideways. The biggest pressure doesn’t come from the issue, it comes from the lenders. They will do what needs to be done to recover their position, the first charge on the asset and the loan agreement gives them pretty much full control.

I have come across a few investors, who refuse point blank to engage with any banks or lending institutions. Some from previous bad experience, and some because their Islamic faith forbids not borrowing but the payment of interest. This commandment is given with good reason. Going back in history those who engaged in money lending, or the old name ‘usury’ were frowned upon. Indeed, as I understand, it was the only time Jesus got violent, when the money lenders were conducting their business in a place of worship.

Now it is normalised, a given. If you wish to buy a property you will need to take a mortgage for the majority of the purchase price. This is in large part to the disparity between what the average person earns in comparison to the value of a house. The margin between these two has widened over time, increasing the need for borrowing to the point it becomes inevitable.

In this environment, with instability on many levels, there is a strong case for doing less deals, but in cash.

And if and when rates come down to very low levels, a low LTV loan could be taken, with the aim of clearing it, or being in a position to clear it at short notice.

This is a far more stable position to operate from in the current environment. Allowing one to focus on the speed bumps which inevitably will come without the pressure of lenders breathing down your neck.

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Suresh Vagjiani

19/08/2023

The recent Allsop auction results had a sales rate of 76%, this leaves 53 properties left unsold, from the 215 initially offered.

This auctioneer in the past used to have results of 90% plus. Obviously, this is an indication of the market slowing, but also that the reserve prices set are not realistic. A property is always worth something. There is a disparity between what the sellers are expecting and what the market is prepared to pay.

Many of these unsold lots belong to administrators, and housing associations. Administrators generally have to sell; if the property remains unsold in the auction, this leaves the door open for them to take a bid post auction. There is justification for taking the lower than expected bid.

There are times housing associations have to sell, sometimes for accounting purposes, their liquidity position may need to be improved. I recall an auctioneer we used to work with heavily calling me up and saying this housing association needed to exchange on an asset urgently. It was a freehold block in Kings Cross for £350K – a killer deal.

Auctions are the often favoured means to sell repossessions and for charities, and associations due to the transparency of the process. Everyone is free to engage and bid, there are no barriers to entry.

The properties which remain unsold could be perceived to be the bottom of the barrel, the stock nobody was prepared to buy. Therefore, not worthy of attention; better to focus on the fresh stock of the up and coming auctions.

In this market, which is creaking and adjusting, my feeling is there will be many bargains to be had from the ‘unwanted’ unsold stock.

There are some markers which can be used to shift through the unsold lots. One is when a property is listed in the wrong auction, for example, something in Southampton listed in a London focused auctioneer. This is less so the case now, when everything thing is listed online. Though I believe it still occurs. This property is likely to go cheaper than if listed in the local auction. Perhaps due to the segment of end users who would never think to purchase in an auction unless they had seen the board outside the property on a school run.

Another is when the tenancy is listed as ‘unknown’ especially the case with repossessions, where the person who has been foreclosed doesn’t want to share the tenancy details. The administrators are forced to sell the property listed as tenancy ‘unknown’, this can devalue the property to as much as half price. Recently, we sourced a property where this was the case, but we had inside knowledge that this was an AST. So, we managed to get 30% off.

There are times when properties have been measured incorrectly leading to a lower valuation. For example, a square building with three floors generally does not have a different square footage for every floor, however this has occurred, and will occur. There is also some confusion regarding the different descriptions of net internal areas, which contribute to this.

The above is applicable to both live and unsold lots. It serves as a tried and tested filter, but is by no means exhaustive.

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Suresh Vagjiani