how to make a short lease property work for you
Tuesday, February 04, 2014 by Ed Mead
For many people the idea of buying a short lease property is anathema. Surely a lease value drops in proportion to its lease length and is consequently a diminishing asset. Surprisingly this is simply not the case for two reasons.
Firstly the value reduction is not a nice linear curve to zero, it’s logarithmic with the vertiginous falls not happening until the lease is below 20 years. A 90 yr lease is worth c. 95% of freehold, 75 yrs c. 90% of freehold, 45 yrs worth c. 78% of freehold, 15 yrs worth c. 52% of freehold, 10yrs worth c. 42%.
Secondly most of the short leases are in central prime residential areas. This not only ameliorates the diminution in value as the location is so good but is likely to mean they’re in well, or even estate, maintained buildings on The Cadogan, Grosvenor or Wellcome Trust Estates.
The reason these leases can look attractive is that many of the foreign buyers competing with Londoners to buy in prime areas simply don’t understand short leases and are unlikely to bid on them even if they are cash buyers. Of course a short lease needs to be bought with cash but when compared to the value with lease extension in place this cash purchasing sum is a relatively low LTV figure and borrowing is possible to acquire the long lease as per usual.
Opportunities exist, with the correct advice, to buy short leases and extend and below is an example of how an enlightened buyer took advantage of just such an opportunity. If you see one, don’t reject it but speak to someone, numbers below.
In April 2009 D&G sold a flat in SW7 on an 18 year lease for £450,000.
In July 2011 D&G struggled to sell the same flat on what was then a 16 year lease.
In February 2012 D&G’s Lease Extension Department negotiated a 90 year lease extension on behalf of the owner in exchange for a premium of £1,015,900.
In July 2013 D&G sold the flat with the benefit of the newly extended (104 year) lease for £2,550,000.
Sale price of newly extended lease £2,550,000
Value of 15 year lease in 2012 say £900,000
(based on comparable sales of short leases within the block)
Cost of lease extension (negotiated by D&G Valuation Department) £1,015,900
Lessee’s Profit £634,100
This represents a return of 33% and is not unusual.