Here is a write-up of their conversation.
Karl Griggs: For those that don’t know me, I’m Karl Griggs from Commercial Processing Centre. And today, I’m at one of our investors’ project properties. It’s been a conversion going on for over two years. I’m joined by Sanjay and Malkit from Savoys Properties. They have been nominated for four categories in the Property Investor Awards, and we’re meeting at one of their properties in Burnham. Do you want to take us through the history of it?
Malkit Purewal: So we purchased this site, which is a former office for £670,000. We went through numerous planning applications and got up to 10 flats, all self-contained, approved. There are two two-bedrooms, five one-bedrooms, and three studios. So we’ve got that valued higher with the planning and then decided on pursuing the renovation works.
Karl Griggs: But when you first bought it, you paid over the value?
Malkit Purewal: That’s right.
Karl Griggs: So if I remember right, the bricks and mortar value was £475,000? And you paid £670,000 purely based on what you could see the end result would be?
Sanjay Kumar: Yeah, permitted development rights were there so we needed to convert the property from an office to residential. Then, it was just a matter of the number of flats we could get in there.
Karl Griggs: So you took a risk?
Sanjay Kumar: Yes, we took a risk.
Karl Griggs: You had no planning at all at that stage?
Malkit Purewal: When we came to initially look at the site, most of the investors saw that you could make five flats. However, through looking at the permitted development rights and the prior approval rights, we understood that you could probably get eight to 10. So, we initially started off with getting the five flats, that everyone else sought approval for. And that was our exit strategy, our worst-case scenario. Once we had that approved, we went for the eight. And then finally for the 10.
Karl Griggs: Because as soon as the first stage of planning was granted, the value automatically went up to £760,000, without you doing any work.
Sanjay Kumar: Yeah.
Karl Griggs: So overall, you paid £670,000. What was the cost of the works?
Malkit Purewal: I think the cost of the works, is going to come in at £500,000.
Karl Griggs: And then what do you expect the gross development value to be?
Malkit Purewal: We were given a figure for eight units, and I think that was at £1.8m. And now we’re expecting it to be above £2m.
Karl Griggs: Yeah. So there’s still money to be made from it, even though you’ve initially taken a risk with no planning.
Malkit Purewal: Yeah, that’s right.
Karl Griggs: Stage one, or phase one, as they call it, and phase two planning, to end up where you are. And then, with the 10 units, what’s the estimated rent?
Malkit Purewal: Well, for the studios, I believe the rent is going to be circa £770 per month. I think the one-bedrooms will rent for £900 to £950 per month. And then the two two-bedrooms that we have will be £1,100 per calendar month.
Karl Griggs: So that’s over £100,000 per year?
Malkit Purewal : I believe so, yes.
Karl Griggs: So then you’ll be able to get all your money out on completion, a new mortgage, and additional money to start the next project.
Malkit Purewal: That’s right.
Karl Griggs: So the overall structure of it was still a risk, as we said. Because in the worst-case scenario, you would have fallen back to the five units. And that would have covered your money as well?
Malkit Purewal: I think we would have broken even on that. On the five units, the valuer valued it at £475,000, with that particular planning.
Karl Griggs: Did you do any work, or did you just wait until you had the correct planning?
Malkit Purewal: No, we basically just rented it out as a short term let as an office and waited for all the planning to be put in place before we started works. The reason for it was that it would actually end up costing us more doing work in stages as opposed to doing it all at once.
Karl Griggs: So, it’s been a two-year project from when you completed in December ’18, and initially, we completed on a commercial term basis. Then, when planning was granted, you switched it to a refurbishment loan. And now you’re going back to a term loan on a residential basis to get all the money out. All right, any other projects in the pipeline?
Malkit Purewal: We’ve got quite a few; we started doing some for other customers. We have three HMOs that we’re doing.
Karl Griggs: Are you still staying with HMOs yourselves or have you got a different plan going forward?
Malkit Purewal: We’re doing HMOs, where we’re taking mixed-use properties. So if it’s got a commercial element, we may look at changing that to residential. And if it’s got some uppers there that are really residential, then we’ll look at going to HMO on there. But the projects that we’ve got lined up at the moment, are more commercial with permitted development rights to residential.
Karl Griggs: How much work do you do in advance of purchasing a property?
Malkit Purewal: So before purchasing it, we liaise with our planning consultants and architects to see what we can get out of the site, whether there are any constraints to it, then we get the plans made, and then we intend to submit that around the time we’re going to exchange.
Karl Griggs: How do you find the properties, are they normally auction purchases, direct from sellers or through estate agents?
Malkit Purewal: So it’s actually a mixture of all three. So the ones are going to auction, we do look at but this year they’ve been going for a lot higher prices. The ones direct from vendor are ones where we can negotiate and get a decent price on. And the agents do come to us with some attractive lots as well.
Karl Griggs: You also have different types of properties since moving to Windsor on a couple of projects because you have access to non-conforming properties that you then convert to mortgageable properties, which is a new market for you.
Malkit Purewal: We wanted to experiment. So, we had a look at the non-standard construction properties. They’re a lot lower price than other properties of that type. For example, we purchased a three-bedroom property in Windsor for £340,000. Properties in that area tend to start, if they’re standard construction, at sort of circa £500,000.
Karl Griggs: And the cost of doing a project like that?
Malkit Purewal: I think the cost of doing that is circa £100,000-£130,000.
Karl Griggs: And that’s conversion to an HMO.
Malkit Purewal : That’s to an HMO and doing the works to make it mortgageable.
Karl Griggs: And the end value on that?
Malkit Purewal : I believe the end value on that was £550,000, on that particular one.
Karl Griggs: So really, it’s all about the research, finding the right property, knowing the planning, and making sure you get your money out of the back end.
Sanjay Kumar: That’s right and using the right broker!