#NicoKnows: The Saturated Market

I hope you enjoyed reading the first blog - if you missed it you can catch it here: 


https://www.luxor-group.com/press/nicoknows-the-luxor-lowdown



My focus an active developer and landlord with a large portfolio was in the postcode areas of L6 and L7. The brand was well established and had an excellent reputation, any of our properties coming to market would be snapped up before the existing tenant vacated. The early production line was working perfectly. If you missed my podcast from last week have a listen as I discuss the property business to that of a production line. Link at the end of this blog.


We had been instrumental, along with a few other investors, in turning derelict run down houses and former Victorian Mansions in to modern luxury homes. The area started to become extremely popular with students and young professionals due to the improved housing on offer at affordable prices.

Since I started acquiring in the area in 2012 the area had seen a rapid change. It was now becoming an investment hotspot, with attractive yields and strong prospects for capital growth. It had now attracted the attention of London based investors seeking better returns than the City could produce.


Consequently, the market was now becoming saturated. When I first started my aggressive buying spree you could purchase a run down terraced house for low £30,000s and a poor condition block of apartments on a freehold title for £20,000-£25,000 per unit. I used various strategies and innovative methods to create added value from these properties which I will share as part of Nicholson Academy.


Entry level prices such as this was perfect, it allowed for multiple acquisitions as it didn’t put great pressure on cash flow. It allowed for a proper refurbishment to be undertaken to a higher specification due to there being budget headroom and eventually once occupied market leading yields.


This was no longer the case, my hidden area was being exploited changing the financial landscape forever - some investors were happy to achieve a fraction of the yield I was accustomed to achieving and therefore prices started to sky rocket. Demand was soaring and because there was little additional stock being created by way of new construction supply remained the same, simple supply and demand economics, prices pushed up.


You could still make a decent return but not hitting it out the ball park like I was accustomed, as a result there would be more risk, more competition and projects fitting my exact and tight requirements we’re becoming rare.


It was frustrating that people had “entered my territory” I thought, this was my safe haven for investment and it started to become saturated. That was my short term view but in reality having regard to the long term goal it couldn’t have been better.


More investors flooded the area creating quality stock meaning it attracted more of the ideal tenant profile, consequently creating a premium to enter the market and increased rental prices ensuring my earlier investment had increased many times over. Investors were paying upwards of £70,000 per unit for what I thought were crappy properties, some increase in comparison to my glory days of £20,000 per unit.


Some may counter if purchase prices have increased surely the end values have increased and therefore you can make the same margins.


I am huge believer in Warren Buffet’s approach adopted from Benjamin Graham, that the market is simply another player. You should invest to your own parameters and the intrinsic value of an asset to you, not what the market dictates. What happens when market volatility kicks in prices are depressed? What the market once told you it is worth it is now substantially less and you are under water. A risky and dangerous place to be.


A further issue is lender’s exposure and appetite to the postcode. Due to the area being so popular a lot of lenders, both high street and challenger banks, had advanced vast sums secured against investment property in the area. With my knowledge and experience I soon realised that this may cause funding issues in the near future.


Lenders would feel exposed to property in the area and should volatility occur in that locality it could have ramifications. Another potential issue brewing was the “absent” landlord. Investors from down south would pursue the area aggressively for the high yielding opportunities. From a lenders perspective they would be exposed to the skill of the property management/letting agency who they had no recourse to. If they failed in their duties the properties could fall into disrepair and no longer be income producing at the serviceability requirements stipulated in the borrowers loan agreement.


Their security would be in jeopardy and the agent would be free to walk away.

Lenders would therefore withdraw from advancing investment loans in the postcode meaning you could not exit your project on long term finance. Due to the properties being investment based no one would be able to raise funds to acquire the property so you would be left swinging and exposed.


As I was completing my final project in Liverpool 7, 12 x 2 bedroom apartment scheme known as Nicholson Court, this scenario I envisaged came reality. I had an investment loan lined up with a lender I had an long standing relationship with but they couldn’t complete on the terms by the time the development was complete they had put a hold on lending in L7. The lender was apologetic and stated that should I invest in another postcode they would be more than happy to look at a new loan.


Now there are always other lenders you can contact, which I had to, but this type of disturbance can effect you. It caused me a great deal of stress and sleepless nights as I had already acquired the next project and desperately needed to release funds to push forward with expanding my empire.


I wasn’t too concerned as I knew how good my product, portfolio and track record was but I now had to set about telling my story again, back to the drawing board completing lengthy application forms and losing precious time. The very next lender I approached snapped up the deal and completed the loan in record setting time. I am still working with that lender to this day.


I like to de-risk every investment I undertake and consider all scenarios when pushing the button. If values don’t push up as anticipated and rental levels don’t reach the desired level am I still content with the end position? Will I be in a precarious position and exposed? If I can live with the worst case scenario which is the basis of all my due diligence then I take the plunge.


I look at every eventuality but try and push that to the back of my mind and proceed on the basis of Plan A. I am a believer that if you have a Plan B up your sleeve and it creeps into your mind and all of your plans you are almost admitting defeat and giving yourself that safety net. I work well under pressure and do everything possible in my control to ensure and influence the outcome of my investments. You need to be strong minded when you are creating a new market and regenerating an area.


So why invest in a totally different area you may ask? Why St Helens?

I started to undertake rigorous analysis of new areas to invest.


This included:

1) analysing the planning portal - what new developments where in the pipeline and what type of companies where making the area their new home?

2) What type of employment was being created? Was there a demographic that hadn’t been discovered?

3) Which area had great infrastructure in place and good commuter links?

4) What was the council’s plans for the area - any plans for regeneration?


To get the answers I would speak with local property agents and bank’s branch managers to try and get an idea of likely tenant profile. I discovered that there was a young professional market with disposable income wanting something that resembled city centre apartment living, I couldn’t believe no one had tapped into it - the product and offering didn’t exist - “build it and (they) will come” I thought from the move Field of Dreams. I could keep my dream alive with this new area to invest.


St Helens had all the perfect ingredients to make the next hotspot and it was untouched meaning like my previous strategy in L6 and L7 I could get an early strangle hold on the market and make it my own.


I have never adhered to the adage “Location, Location, Location” - if you invest in an area that is already an established area then you are paying a premium to be in that location. I believe you need to be an early investor and create an area. That way when that area ends up being “location, location, location” you benefit hugely from that capital appreciation.


Now I had my heart set on St Helens town centre how did I go about choosing the 15,000sqft Art Deco Tyrers Building constructed in early 1900s?

It occupied a prominent position in the town centre located directly opposite the main shopping centre the council eventually acquired for c£27M. It previously housed the towns equivalent to John Lewis, a 5 storey retail business that was one of the longest serving family businesses in the UK, established back in 1880s. This iconic building would be the largest deal of my career to date.


One thing I had always done all my career was to take a drive around my pipeline areas at night looking for properties that had For Sale boards up or were derelict, go home jump on Land Registry and send out a letter to the registered proprietor of my interest in their property.


This time there was an A board erected for sale and the local agents name clearly displayed, that was easy for a change I thought and because it was clearly available with no offers it unnerved me slightly. Late into the night as I stood outside the building, having dragged Kristina out for a midnight drive, I fired off an email expressing my interest and requested a viewing. I also made a note to call the agent mid-morning the next day.


I’m a huge believer in “Follow Up Follow Through”. Some may fire and email off and wait. I never wait, you must be like a dog with a bone, tenacious and enthusiastic, until you get what you want. I’m not embarrassed to call someone 10 times a day if need be to get what I need. In this day an age when everyone wants to be a developer or investor if you don’t pursue your target vigorously someone else will.


I spoke with the agent and confirmed an early viewing at the property. It was very much a department store with make up counters and changing rooms still in place, the restaurant and salon on the top floor was even in situe.

I remember walking around getting excited by the sheer size but it also dawned on me the task at hand, this was a huge undertaking. It was hard to even comprehend a residential scheme on the upper floors because you couldn’t see passed the department store that stood before you.....and all the structural walls throughout the property. How much would all this cost?!?


How would I go about working out an offer to buy the building? How many units would I create from the space and what would they be worth? Would there be a demand for the product I was proposing to bring to the town, after all my offering didn’t even exist currently, I was going to have to create the market place.


The asking price was £650,000 plus VAT. Would it even be financially viable

I best get a second viewing and come with an architect was my first thought. I arranged further access with the agent and contacted my architect.

He stepped foot in the building and saw opportunity, relieving some of my fears about the cost of the conversion. I wasn’t lulled into a false sense of security though, just by looking at the sheer number of single steel framed windows in the building I knew that alone would be a substantial cost to upgrade!

The architect went away and drew up some potential residential schemes using the floor plate and measurements he had taken on site.


When doing so we had to take careful consideration as to what walls had to be retained an which could be removed. We also set up a meeting with M&E Consultants to see whether the existing electrical load would cope with our proposals, of course it wouldn’t and something that is often overlooked was one of the largest outlays for the entire scheme.


With a scheme to hand I now needed to conjure up an offer. This meant I needed to calculate the Gross Development Value (GDV) once complete and the likely construction cost. This took substantial due diligence pouring thorough Land Registry transaction data and reviewing the market and picking the brain of local agents.


One issue was that the product I was creating, high specification modern apartments targeting young professionals, didn’t exist directly in the town centre. There was some good comparables.....before the recession - great I thought just what I needed! I now had to alleviate any fears and dig about into what happened at this development to set it apart as an anomaly, to explain to a valuer when I'm looking to exit the development on long term finance. I found apartment slightly outside the town centre which matched my thoughts on value which I took some solace from.


As I set out earlier when formulating my investment strategy I always adopted the figure that made my development as risk free as possible, the worst case. At the end of the day I would be using my knowledge, expertise, cash and marketing strategy to create this market and I wasn’t going to pay a premium for the role I was about to play.


Say my product never took off and I was stuck achieving the prices and rental figures already being achieved in inferior properties nearby? This was the figure I must be led by, not the potential.

I discussed the potential construction costs with my architect and quantity surveyor having early contact with my existing suppliers. I would call them relentlessly - I’m going to be building 15 apartments and I need you to bring down your price per square foot I would hash out time and time again. What’s your best price? I would use the fact I had been loyal for years and always paid on time. I have always made sure my contractors, staff and suppliers are paid in full and on time.


I had a good reliable track record. I have never understood developers who do not pay, there’s only one outcome the work will come to halt adding time to the job. With substantial holding costs on larger developments keeping in budget would be in jeopardy. I like to get in and out as quickly as possible to get them occupied and passive income pouring through the door.


I was now armed with the GDV, likely values and income that could be produced once completed, an estimated construction cost and therefore was in a position to make an offer.


Make sure you come back next week to read how I convinced the seller my offer was the best offer out there and why they should proceed.


Was I going to proceed without planning? What if others got wind of my proposal? With this being an iconic famous building in the heart of the town centre what role would the local press have in formulating views of the community?


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