We recently blogged about the changing dynamics in the London residential market and the evolution of Mayfair Capital’s strategy to invest in Greater London as Prime Central London (PCL) price growth has fallen away.
Since February we have met and spoken with 270 residential agents, finance brokers, banks and developers. As a result of our refined and new strategy we have been searching for projects in ‘affordable London’, targeting developments in undersupplied commuter locations which will appeal to homeowners. Typically units in these developments will be available at less than £1,000 per sq ft and £1m per unit, being undertaken by developers with established track records. We have assessed 38 schemes with end values of £10m to £35m in areas as diverse as Acton, Charlton, Wapping, Clapham, Battersea, Victoria, Croydon, Sutton, Camden, Ealing, Shadwell and Balham (to name a few).
Our conversations have revealed that the fastest selling flats are in the bracket of £250,000 to £400,000 and at less than £600 per sq ft. There remains a funding gap in the higher loan to value arena despite the influx of challenger banks and peer to peer lenders who are quicker to respond, but more expensive than the High Street lenders. The preference for lenders is to avoid PCL and single houses in particular. Overall lending interest rates have however fallen from 2012.
As a guide, a typical development in today’s market will require 20% profit on cost. The senior debt could be up to 65% of cost at 7% interest rate per annum plus fees bringing their Internal Rate of Return (IRR) to 10%. Our loan at 65%-90% of cost will have an IRR of 15%. The equity providers of the final 90-100% of cost will expect returns in excess of 20% IRR.
Our original residential fund MCR1 (which targeted PCL) is on track to exceed its target of delivering an IRR of 15%, having returned 89% investors’ equity, with the final two investments expected to be realised in the next six to 12 months. We are looking to replicate the first fund’s success by continuing to fill the higher loan to cost gap but moving our investment focus to Outer London.