Residential Refurbishment - 5 Bed HMO For Social Housing
RESIDENTIAL REFURBISHMENT TO CREATE A 5 BED HMO FOR SOCIAL HOUSING
COBURG CRESCENT, LONDON SW2
Gross loan £485,979 LTGDV 49.59% Deal Type Conversion & Refurbishment DEAL DURATION 9 MONTHS
The Opportunity
Lambeth Council, in South London, is being pushed to provide more homes for tenants in receipt of housing benefits, under the Local Housing Allowance (LHA) model. Coburg Crescent, on the Palace Road Estate, was originally built by the local authority in the early 1960s and housed council tenants in spacious, single-family dwellings which also had their own integral garages. By the 1990s, all houses had transferred to private ownership, but retained the restrictive single-family covenant as part of the freehold transfer. Under pressure for urgently required, affordable housing in the area, the Council had issued HMO licences to private landlords for other properties in the same road to enable conversion to affordable housing. They were now in the process of issuing a licence for this property to be converted into an HMO with 5 self-contained, ensuite studio apartments and a shared kitchen.
On the borders of Brixton, Streatham and Tulse Hill, the property location is just south of the A205 in a predominantly residential area of South London. The A205, Christchurch Road, is located adjacent to the northern side of the Palace Road Estate and forms part of the main arterial South Circular Road which has a junction with Brixton Hill to the west. Tulse Hill station is located within walking distance to the east providing Thameslink and Southern Rail services into and through Central London. The property itself is a mid-terrace town house consisting of a ground floor and integral garage with four upper floors. The developer intended to convert it into five single, self-contained, ensuite studio apartments with one room on each floor and a shared kitchen/laundry room on the ground floor.
The Deal
Key to the transaction was the granting of an HMO licence by Lambeth Council to the developer and there was a precedent in the road already, with other similar properties having undergone conversion, despite the pre-existing restrictive covenant on them concerning single family dwelling status. The Council need more affordable/social housing, therefore permission was expected to be forthcoming. Nevertheless, in order to mitigate against any problems with this permission, indemnity insurance was taken out by the developer to commence from day one of the deal which would cover this risk.
Aside from relocation of the boiler, re-running of pipework, and installation of smart meters, no material changes were expected to the services currently installed and no major structural works were needed, nor refurbishment/replacement of any windows. Costings for the conversion were estimated at c.£140K, including fees, all included within the loan facility.
The local area is generally considered to be inferior in value compared to neighbouring parts of South London and values in the short term are likely to remain relatively static at this lower end of the spectrum. The proximity of good transport links is an advantage to the location and, with the rising cost of living, the proposed units are likely to be attractive to the younger sector of the market who struggle with both saving for a deposit and/or paying high rents. Given the size of the rooms and limited facilities, the proposed units would not be capable of individual re-sale and, as small self-contained units, would likely represent the bottom end of the accommodation market.
The proposed exit will be BTL refinance and it is expected that the intended lenders for this would similarly require satisfaction with both the expected HMO licence and restrictive covenant indemnity insurance policy; as part of the deal with Pivot, the developer has to provide satisfactory evidence of refinance no later than 6 months after initial drawdown, or otherwise the guarantor would be expected cover the loan repayment; the likelihood of selling on the open market being difficult without an HMO licence already in place.
Key Transaction Highlights
• The contractor had already completed similar conversion/refurbishment works on identical properties in the same terraced street.
• Adequate unencumbered assets were held by the guarantor to secure the finance in its entirety.
• Indemnity insurance in place from day one to mitigate any risk regarding HMO conversion permission problems from the local council.
• No major structural works needed to convert/refurbish the property
• Shortage of similar rental accommodation in the area ensures no problems with finding tenants.
Deal Team
Relationship Manager: Shahil Kotecha, Pivot
Credit Manager: Jay King, Pivot
Legal: Field Fisher
Valuation: Strutt & Parker
Project monitoring: TecCre8
Comment from Shahil at Pivot:
“This property purchase and conversion follows similar projects in the same location by other developers, and although there were concerns over the granting of an HMO licence, we arranged for insurance cover to mitigate the risk so the deal could go through and much-needed, affordable accommodation was brought to the market in a popular part of South London”
Comment from The Haris Akhtar, developer
“Having been let down by a previous finance provider who had concerns over the HMO licence provision, Pivot saw the potential of our plans and immediately stepped into the breach and worked with us to liaise with the local council and acquired the necessary insurance cover to mitigate any potential risk of a negative outcome to our negotiations. They were positive, knowledgeable, patient and understanding and I am delighted everything is going through as planned”