Updated: Sep 20
LUDGROVE NEWSLETTER: JUNE 2019
Over the last two years Ludgrove has experienced increasing demand for London Apartment Blocks by Investors looking to capitalise on weakness in the Central London property market. It is in this context that Ludgrove has today launched a specialist Apartment Block Department for buyers. In this note we outline why apartment blocks are hard to find, why Investors find them attractive and how Ludgrove can assist and add value to Buyers.
Why Are Central London Apartment Blocks Hard to Source?
1. Scarcity: London apartment blocks are rare. Most blocks are historic conversions of period houses that have been broken up and sold as apartments over the years. This means there are very few stand alone, unbroken apartment blocks available for sale.
2. Investor Discretion: Existing Investor-Owners of apartment blocks are often reluctant to advertise blocks for sale on the open market as this may risk tenants vacating the property or question whether they should extend their tenancies at renewal date. The vast majority of these Vendors therefore chose to sell discreetly in the off-market
3. Developer Discretion: Where apartment blocks are owned by Developers as stock for sale (new builds or refurbishments of period properties), many are willing to consider selling in one single transaction but they are highly unlikely to advertise this in the open market, lest they discourage potential buyers of the individual apartments. Once again these Vendors would prefer to sell the block discretely off-market.
Benefits of Investing in Unbroken Apartment Blocks
1. Value: For obvious reasons, bulk buying a single block containing multiple units generally leads to deeper discounts and better value. Developers are often keen to sell the block in one single transaction so their capital can be recycled more quickly, thereby achieving higher returns on equity. For Buyers, book costs can be below break-up values, giving the investor the optionality to sell the units piecemeal and realise attractive returns over a longer time frame.
2. Tax Efficient: Building an investment portfolio of individual apartments in Central London can be costly in large part due to high Stamp Duty rates. For example, an investor acquiring 10 separate apartments at £1.5m each would spend £1.39m in tax (9.3% effective tax rate). However, if 10 apartments in a single block are acquired for £15m, the transaction is taxed at the Commercial Stamp Duty rate and here the tax due is £740k (4.9% tax rate). Furthermore, a significant number of apartment blocks are owned in corporate SPVs where effective tax rates can be even lower.
3. Greater Liquidity: Whilst London residential property has historically been an attractive investment due to its tendency for relatively consistent, low volatility returns throughout the economic cycle it suffers from weak liquidity (like all real estate investments). By bulk-purchasing apartment blocks however, liquidity is substantially improved as individual apartments can be sold piecemeal as and when future liquidity is required. This can be especially appealing to Fund Managers and Service Apartment operators who may require access to capital to meet Fund redemptions or strategically as more attractive opportunities arise. Achieved exit prices are also likely to be enhanced in comparison to a bulk sale.
4. Operating Efficiency: Owning and maintaining a single apartment block with a large number of units is considerably more efficient than owning a diverse portfolio of apartments scattered across London. Management and operating costs can be substantially reduced.
5. Value Enhancement: The vast majority of blocks we have access to are Freehold properties giving the Investor complete control of the asset. Where possible (and subject to planning) some of these properties can be refurbished, reconfigured or extended generating additional upside to capital and rental values.
6. Yield Enhancement: A number of the blocks we have access to have C1 licensed-use meaning they can be operated as serviced apartments or short lets throughout the year. Serviced apartments tend to achieve net yields c30% above standard long-let tenancies. Standard residential blocks (ie C3 classified) also offer the Investor the opportunity to optimise the overall yield by periodically letting out some units as serviced apartments or short lets (provided they do not exceed the regulatory maximum of 90 days in a year). Through development, rental yields can also be substantially improved by reconfiguring blocks into smaller studio and 1 bed units which achieve much higher rental densities per square foot.
7. Reduced Void Risk: By owning multiple apartments, Investors can reduce the risk of a single void having a disproportionate impact on their overall rental return.
1. Market-Wide Access: The Central London apartment block market is difficult to access. Blocks are almost entirely sold off-market and investors simply don’t have the time to build up the contacts necessary to access the market in any meaningful fashion. Over the years, Ludgrove has built up a network of contacts including Receivers, Accountants, Lawyers, Private Banks, Mortgage Brokers and other intermediaries providing Investors with in-depth market access. Currently we have access to over £800m in apartment blocks across London in locations including: Bayswater, Bloomsbury, Camden, Chelsea, Clapham, Edgware, Fitzrovia, Fulham, Hoxton, Hackney, Hammersmith, Hounslow, Kensington, Knightsbridge, Marylebone and Soho.
2. Professional Appraisals: Ludgrove acts on the Buyers' behalf carrying out detailed appraisals of each block. We analyse the local market assessing recent comparable sales, rental values and development potential enabling the Investor to quickly assess whether the asset is a worthwhile investment. Where possible we also analyze the financial accounts of Owners to determine their financial position and motivation for sale. In a notoriously opaque market this offers considerable value to Investors.
3. Relative Value: In order to determine the value on offer in an apartment block, Investors need to consider a range of metrics across the market. Our access to over £800m of blocks enables Investors to establish whether each asset offers the best investment on a relative basis. Below is a sample of some of the assets we currently have access to with some headline metrics:
4. Timely Decision Making: Almost without fail, details on apartment blocks will include a myriad of confusing and incomplete information. Investors then typically spend days wading through the data to determine if the asset is worth further consideration. Ludgrove carries out our own in-house research and analysis on each asset. All this information is condensed into a salient Summary where Investors can decide within minutes if the asset is of interest or not.
5. Partners: Ludgrove has built a number of strong relationships with partners who can manage the entire rental management of the property on behalf of Investors. Our partners include Rentify who offer Landlords a fixed-yield alongside management and maintenance as well as Residently the ground-breaking, turnkey Rental App provider. In the Serviced Apartment space we are partnered with Silicon Valley market-leader Sonder and and in the niche Prime London short-let market Pippa & Benoit.
Bespoke furniture package company Creative has successfully executed numerous Apartment Block furnishings in the Private Rental Sector/Built to Rent market on behalf of large Investors and Family Offices. Their product has a proven record in maximising rents and swiftly achieving full occupancy.
Planning consultants MBA Planning have specialist expertise in achieving planning permission in difficult circumstances. Weldon Walshe are a high value-added residential design and pre-acquisition advice architectural business. 4M Group Design and Build have a proven track-record in spatial design and achieving record £/PSF capital values on behalf of clients.
Ludgrove also works with a leading firm of tax advisors, Gerald Edelman. Gerald Edelman are based in the City of London and provide their clients with outsourced taxation mitigation strategies and tax compliance services.
If you would like more information about how Ludgrove can help you acquire London Apartment Blocks, feel free to get in touch.
CEO of Ludgrove Property Ltd
Tel: 0207 889 2860