Introduction:
The property consists of adjoining former office and storage units, situated on the lower ground floor of a pair of period semi-detached properties in South London suburb. One side (storage) can best be described as ‘Shell’ condition, with the other; the former office (which looks suspiciously like a flat already) is in need of full refurbishment, with some damp issues to resolve.
The property also has a designated rear garden / yard (approximately 30 sqm) which, after making provisions for both cycle and bin storage, provides sufficient space for allocated rear garden(s). Pre-approval has also been granted by the local authority for the conversion of the units into 2 No. 1 Bed Flats. For which plans have been provided.
The immediate local area is predominantly residential, although two small commercial units (motor trade) adjoin the site to the rear. Residential flats in close proximity start at not less than £150,000 (studios), with good one bedroom units typically starting at around £200,000. The property, as it stands with consent in place, is likely to be available with a guide price of £150,000.
Propportunities:
The vendor holds the properties on long (125 year) leases, which currently restrict use to commercial nature. However, we understand an agreement has been reached with the Lessor to surrender and re-grant new leases (999 years) with residential use permitted and for the conversion, as per the pre-approval granted by the local authority for the conversion of the units into 2 No. 1 Bed Flats (plans avaible).
This leaves two / three options:
- To retain the property in its current form (repaired) and sale / let out as storage units;
- To refurbish and reinstate /convert to office units, for which we understand there remains a reasonable level of local demand;
- To proceed with new leases and convert the property into the two flats, as per consents granted, for which there is considerable demand;
Analysis of Options:
Storage Units
The most straightforward and low-cost option, with a proven demand for such facilities in the local area. The works would be limited to some minor repairs and decoration, along with some improvements to outside space and access. Units of this type and size would typically rent for around £2,500 to £3,000 per year, so an overall gross income of around £6,000 per year, or around 3.75%, if allowing £10,000 for improvements and initial costs.
Office Accommodation
Without the need for new leases or freeholder consent, works to convert into modern office suites could be immediate and less controlled than the residential option. Assuming no major defects and considering major services, water, drainage and electricity are already in situ, we have applied a cost budget of £20,000 per unit for the conversion, depending on specification. Adding a further £10,000 for professional fees and associated services, total capital expenditure would be in the region of £200,000.
Local research has shown similar units to command £6,000 to £8,000 per year, giving a gross return of £12,000 to £16,000 for both, or a yield of between 6% and 8%. Whilst this would represent a strong yield for a residential property, it is not particularly high for commercial assets in the locality and we believe the finished resale value would thus be limited to around £200,000, indicating a good yield, but no significant or immediate capital gain to be realised.
Residential Conversion
Given that the seller has already gone to some lengths to negotiate a change of use with both the Lessor and the Local Authority, it would seem unlikely that any developer would not look to maximising the value of the site, for which plans have been drawn up and approved.
Naturally higher conversion costs would need to be considered and, considering the age and condition of at least one of the units, a suitable contingency would need to be applied. With this in mind, we have included a Budget of £100,000 for the expected works, being £30,000 per unit for general refurbishment, plus £10,000 for damp works, £20,000 for external and communal works and setting aside a £10,000 contingency.
Pricing the properties at the lower end of a scale of local comparables and making some adjustment for a difficult market (almost universally accepted for 2023), we have priced the finished properties at £175,000 each, giving an overall Gross development Value (GDV) of £350,000. This suggests a £100,000 gross margin, or 40% Return on Investment (ROI). With rents for similar properties currently asking between £1,000 and £1,100 pcm, this would equate to a gross yield of around 7% on final value, or around 10% on Capital employed.
Reccomendations:
The options outlined above are all realistic Propportunities, although the difference in value and the considerable return on investment offered through the sale (or rental) of completed residential units, suggests that development of the property has, to some extent at least, been priced in.
Next Steps:
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