Project:
Propportunities previously posted a detailed analysis of a property available post Public Auction, following an unsuccessful (on-line) sale where the agreed reserve price was not reached. Well our associates at Freelands did step in and purchase it as suggested. Before disclosing the final outcome, let’s have a quick reminder of the Propportunity on offer…
Location:
The property is located in little known Brompton, a small village located between Gillingham and Chatham in Kent, in close proximity to the barracks and Chatham Docks. This area, with great commuter links into Central London and easy access to the coast and wider motorway network via the M2, has become increasingly popular in recent years, particularly with commuters priced our town closer to the city.
As well as the commuter community, there is a growing local business hub, with Chatham Docks becoming increasingly trendy in its own right, plus the local barracks and University Campus supporting local businesses. Despite recent successes, property prices in the area are still significantly below those in London Suburbs, with good quality one bedroom flats available for around £150,000 and three bedroom period houses starting at approximately £300,000. The property falls within the Brompton Lines Conservation Area.
Property:
The property is what was the local Conservative Club, which we understand took the decision to close in January 2020 and subsequently entered voluntary liquidation later in the year. Like many such organisations, there are rules to adhere to and procedures to follow in the disposal of assets, often ensuring they are made available publicly in an open forum, to avoid any claims of insider deals or underselling of assets.
The property consists of a large Ground Floor club premises (approx. 1,600 sqft) with a functioning bar, toilets, rear yard and a large cellar spanning most of the same foot print. The two upper floors, which occupy approximately half the floor area (approx. 800 sqft) are a mix of commercial / office space (1st floor) and residential (2nd Floor).
The property was in surprisingly good condition throughout. The residential accommodation tired and there were a few cracks and patches in places, but all seemed to be in working order and we expected that the ground floor could be licensed and trading with relatively little effort, with staff or private tenants accommodated above.
Propportunity:
At Propportunities, we generally look for a little more than simply applying a coat of paint and returning a property to its former use (primarily as there is usually good reason for its demise). This site was no different and what drew our attention was the development potential, something clearly highlighted in the marketing material.
The site was listed as being 0.0658acres in size with (subject to planning) redevelopment potential, either through extension or replacement. Despite being in the heart of the Brompton Lines Conservation Area, the local planning authority (Medway) are supportive of good quality developments, as could be seen by the recent grant of consent to develop land to the side and rear of the former club, on which a new build, containing eight high quality student flats, had recently been constructed.
Residential:
The neighbouring development would suggest that conversion to residential would be an acceptable choice and the size of the site would suggest eight, or perhaps as many as ten, one and two bedroom flats could be built upon the site. Assuming a mix of just eight one & two bedroom units, we would adopt a Gross Development Value of £1.3m, which we calculate could deliver a 20-25% margin if the property is obtained for the £400,000 guide price.
We expected that this is the route that many developers would typically follow, but with planning restrictions and increasingly high build costs, other were also be considered…
Commercial:
At the other end of the options scale was to adapt the whole building for commercial use. Perhaps Brompton village couldn’t sustain another watering hole, but a boom in creative industries, entrepreneurship and remote working does equate to a greater need for small and serviced offices. It is certainly an attractive building and its proximity to good transport services (but at half London rates) suggested this was an option to explore further. Our research found only limited offers in the area, with rents of £20 per sqft demanded for good office space.
Allowing for shared services (Kitchen, WC, Meeting Rooms etc), we expected a range of suites could be made available and, even at a 10% discount to its competitors, could generate a gross income of around £45,000. Allowing for a basic but acceptable makeover, we would still expect a 9% return against the £400,000 guide price. More importantly perhaps in an uncertain market is the significantly lower capital investment required.
Mixed Use:
The perhaps obvious compromise between the above was to pursue a mixed use option. This would no doubt gain support from those seeking to retain a commercial feel to the historic high street, but also spread risk for the investor, through a number of small flats or perhaps a HMO development. Our own research had shown that there was a lack of (quality) rooms to rent in the area and given the rise in young professionals and students (who themselves now expect far higher standards and services in accommodation) we felt this would be a product in high demand. Rental yields would be higher than those for individual flats and the likely higher tenant churn, would be offset by generally shorter void periods.
In terms of achievable rents, we expected an income of approximately £30,000 to be achievable for the upper residential parts, whilst maintaining an income of approximately £20,000 for the ground floor. Whilst capital costs would be a little higher than those for commercial use, we felt the increased rent and disbursement of risk would make up for this.
So what happened?
Well the property was purchased at below the guide and detailed plans for each option were drawn up, with Propportunities acting as a project consultant. By the end of Q1 (2020) plans had been drawn up to proceed with an application to convert the entire building to residential (HMO) …. and then COVID emerged and the world stopped!
Over the next 12 months, plans proceeded as something of a reduced speed, but working closely in partnership with the local authority – and we generally believe most are looking for evidence to support applications, as much as to oppose them– consent was granted for a new HMO scheme, inclduing13 ensuite rooms and high-spec communal spaces, creating a modern, high quality shared-living development.
The Outcome?
Well, with mixed feelings, our associates asked us to analyse all the options available and took the decision not to proceed with the build and instead sold it as a turn-key (or perhaps an oven ready deal given the timing), to an HMO specialist.
The property was passed to a leading National Auctioneer to get exposure to as many qualified buyers as possible and offers were invited prior to the sale, The significant interest from a number of serious bidders led to a ‘best and final’ bidding situation, with contracts exchanged a day prior to the auction sale.
After the time and effort employed in getting the scheme designed and approved, it naturally begs the question as to why the client chose to dispose of the project at this stage?
“Whilst an experienced developer, particularly one with a focus upon smaller and complex projects, we are not active in the HMO market and it does not form part of our strategy. This, accompanied by some concern over ongoing market conditions, ever increasing build costs and other ‘live’ projects drawing upon our resources, it just made sense to exist at this stage of the project and let another party take it to fruition. The attractive (low) purchase price and uplift realised, having achieved planning approval, generated a healthy profit for us, but gave space for the buyer to make a decent return too… so everyone went home happy!”
Whilst not everyone may agree with the decision (let’s face it, we all like to see the finished product) it does emphasise that the dynamics of a project change over time, as does the market and the ambitions of needs of the developer. It is therefore important to keep all influencing factors in mind and regular look at your options at every stage. In a boom, it’s not unusual to see part completed projects amended and expanded to meet increasing demand and rising values, whereas, in a tougher market, selling of sites and land banks become more commonplace. Either of these are usually a good sign of where developers feel the market may be heading, so it’s good to keep an eye on the market, and auction catalogues in particular, so see what’s being offered.
