The residential market in London, like many parts of the country, is challenging in contrast to the growth we saw between 2011 and 2014. Market conditions and recent tax changes have dampened the mood among owner occupiers and buy to let investors alike. Homes are now taking longer to sell, increasingly leaving developers in a difficult position.
In particular, a growing number of remaining units in large residential blocks are sticking, and the dilemma of how much to drop prices before it significantly impacts business and development plans – often at the detriment of the delivery of new homes, is a tricky one. Sales revenues are integral to keeping wheels turning and few developers can afford the luxury of holding out for individual buyers to come along. However, an increasingly popular solution for developers and investors is to carry out a block sale of the remaining units to one investor, which brings in revenue quickly.
There are many advantages with a block sale to one buyer. Many investors purchasing blocks are cash buyers or if they do require finance, the vendor is only dependent on one purchaser and them arranging a single source of finance. The alternative of owner occupiers buying individual units means increased risk of each failing to obtain the finance and complex chains to make the purchase possible with the further hassle of individual valuations and mountains of legal paper work. In a nutshell, individual sales of units mean higher risk and delay. In contrast, a block sale can be achieved within weeks.
Another advantage of block sales is the financial environment for block purchasers can be more favourable than owner occupiers due to tax advantages. There is the potential saving in stamp duty through multiple dwelling relief or if the asset is held in a Special Purpose Vehicle, and this allows some or part of these savings to be passed on to the vendor.
So, what are investors looking for? Ultimately it is either a discount to the true vacant possession value of the remaining units, yield, or indeed a bit of both. Whilst it would be remiss to suggest that there are a multitude of purchasers willing to pay the full vacant possession value of the remaining units within a scheme, we are finding more investors are taking longer term views, especially in London, with forecast exits in 5+ years and using the interim period to collect rents from typical AST lettings or in some cases running serviced apartment operations. When this is the case, we are finding that pricing achieved is often over and above what would usually be associated with block sales.
Allsop has undertaken many successful block sales for vendors where an element of flats within the development have already been sold off. Symons House, a development of 13 apartments in Aldgate on the City of London’s eastern fringes, had 10 remaining flats. The block had further development potential subject to planning consent. The sale of the remaining units as a block completed within two months and achieved the value required by the vendor.
Earlier this year, Allsop also sold 11 apartments within Bolton Studios, a high end development of in total 28 apartments, in the Boltons Conservation Area, a super-prime neighbourhood in Chelsea. The remaining apartments had been on the market for a substantial amount of time via three local estate agents with various sales to owner occupiers falling through. With a block sale, the exchange and completion of the remaining apartments to one purchaser took place within four weeks of Allsop being appointed
In an increasingly uncertain climate, driven mainly by market confidence on the back of the political upheaval caused by Brexit, block sales offer vendors a less risky alternative to individual sales. For investors and developers, time and money are always a priority, so it is no surprise that a growing number are giving block sales strong consideration as a solution to a sticky development project.
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