Revisited - Off-plan flip #4 gone wrong? (ROCE 90%, IRR 12%)

Although 2020 accelerated the urge to live 'anywhere possible' where one can WFH long term, I think most people will always have a tendency to focus on locations with fast/easy access to other areas for work or leisure. Therefore, huge infrastructure investments are usually a sign that prices are more likely to rise faster in that area.

The reGeneration game: Kingston-upon-Railway, Elizabeth and far beyond

Back in 1838, the Kingston Corporation was afraid of competition to their coaching trade and decided that their station along the new London-Southampton railway should be 2 miles south of Kingston, next to a tiny farm and called Kingston-upon-Railway.

In the last century, the area around Kingston-upon-Railway grew into a sprawling commuter town of over 40 thousand and is better known by the name of the tiny farm: Surbiton.

I am not sure how many remember this particular history of Surbiton, but analogue to the unlocking of this tiny farm, new transport hubs -no matter how insignificant now- are bound to attract people.

Look at the HS2; land prices increase and houses are being built in the vicinity of each station along the line despite the first trains are not expected to run before 2030.

To provide a little more insight JLL published a great Crossrail (aka Elizabeth Line) tool in 2015, indicating the predicted price growth around its stations. Some areas would increase by 40% in just a few years due to the Crossrail effect. Pity Crossrail already was common news 5 years before the tool was published, so most of those increases were already priced into the market. A typical example of 'buy on the rumour, sell on the fact' (I used to work in finance for an odd 20 years).

Although I do think, as soon as those lines will start running, new tenants will be attracted by the transport links, followed by fresh waves of buyers.

Proof of the pudding: Royal Arsenal, Woolwich (East London)

In 2013, I was pointed at a 2000+ unit site called Royal Arsenal Riverside in Woolwich. This site was part of a relic of a classic example of Britain's huge naval activity originating in the 1600s as Gun Wharf, peaking in early 1900s to a size of 1300 acres.

Developer Berkeley Homes contributed a serious chunk of money towards the Woolwich Crossrail station box before putting hundreds of flats on top of it and splashing their 'Onsite Crossrail coming soon" banners in all their RAR marketing. Add this to the fact this site is on the Thames and average house prices increased from ￡550/sqft in 2013 to ￡784/sqft today; an increase of 40% over 7 years.

In 2014, a 2-bed unit was reserved at ￡600/sqft with the intention to flip it towards completion.

However, due to the sheer number of new flats being released, the value before completion was only ￡20k higher than my contract price 3 years before! Hence as did not increase as much as I anticipated, this became the first 'finders keepers' one: I decided to take out a mortgage and rent it out.

Now, guess hat happens when tens of units completing at the same time? A fight over tenants resulting in lowering rents. Yes, you will reduce voids but also reducing cash flow and yields. Not keen to follow that path, it was quickly turned in to as SA. The first guest stayed a month and behaved exemplary. The second guest booked for 3 days, stayed 1 and abused someone else's ID, credit card and our fancy flat with a Halloween party causing thousands of pounds in damages a few weeks before the Christmas season started. Happy days...

Time to make a very long story short, after summer it was on an AST so luckily we didn't suffer the SA dip many others encountered this year. Instead, our tenant moved out on 18 March, just days before lockdown. It was let again in Q3 so it's nicely ticking over again.

Granted, a rental yield of 3% does not provide a shocking cashflow but that's only part of your return. Always look at rental yield PLUS capital growth: this unit enjoyed a very decent capital increase every year, including the last 12 months: +5.7%

Despite being a leasehold flat ('we only want freeholds with gardens') in London ('everyone is moving out').

Given the fact Crossrail should be live in 2022 combined with an economic recovery many could be baffled by (roaring twenties deja vu?) this unit is now being remortgaged on a new 5-year fix so it can take full advantage of the next upswing.

• Reservation (Jul 2014): ￡451k
• Completion (Oct 2017): ￡470k
• Value today: ￡540k
• Entry: ￡100k
• NET balance: ￡188k
• ROI: 90% (=ROCE)
• IRR: 12% (=ROCE per year)
• FTSE index (same period): ROI -3%, IRR -2%

Exit and exit.

This example provides a good example of having multiple 'exits' of a deal. The first exit objective was to flip this flat, similar to the previous ones (see previous posts).

The second exit is simply complete and hold. In case you cannot sell at a profit before completion, it is essential that the property offers (a) enough rental income [=yield] combined with (b) a good capital increase potential for the long term.

This sounds easy, but please make sure you are having enough funds to cover your mortgage deposit BEFORE you decide to reserve any property and put down a deposit! If you fail to complete on your reserved property, your contract will rescind (be worth nothing) and you will lose the original deposit. Luckily I made provisions for both exit types.

As Woolwich is earmarked as a major regeneration area and -due to Crossrail- projected to further gentrify for the next 5 to 10 years, it definitely ticks that box hence I decided to opt for exit 2.

This purchase is a typical example of the power of property as a long term asset: despite a mere 3% rental yield, it provides a consistent double-digit total return over 6 years compared to a negative return (maybe just break even incl. dividends) in the stock market.

My next post will finally travel up (mid-) north: high yield paired with an impressive capital increase!

Any questions? Looking for interesting returns? Simply drop me a message.

Disclaimer: this is not investment advice. Always seek independent. tailor-made professional advice before you allocate any funds to an investment.