As an organisation dedicated in making strategic decisions that maximise returns and grow our portfolio, we carefully evaluate each potential deal against our established criteria. Recently, we reviewed an investment opportunity in suburban East London involving the development of five high-quality flats. After thorough analysis, we have decided against pursuing this deal. Here’s why:
Strategic Overview
We base our strategy on two primary approaches:
- Buy to Develop and Sell: Aim to achieve a return greater than 10% within 12 months.
- Buy to Develop, Refinance, and Rent: Seek to pull out at least 70% of invested capital upon refinancing, ensuring viable rental income and portfolio value increase.
Analysis of the Suburban East London Deal
Strategy 1: Buy to Develop and Sell
Criteria: Achieve a return greater than 10% within 12 months.
Analysis:
- Total Investment: £3,260,250
- Sale Price: £3,615,000
- Profit: £316,600
- Return: 9.71%
- Return Annualised: 9.71%
Despite the project being profitable, the return of 9.71% falls short of our 10% threshold. As a result, the deal does not meet our criteria for a buy-to-develop-and-sell strategy.
Strategy 2: Buy to Develop, Refinance, and Rent
Criteria:
- Pull out at least 70% of invested capital upon refinancing.
- Ensure viable rental income and increase portfolio value.
Analysis:
- Total Investment: £3,473,146
- Maximum Loan upon Refinancing: £1,125,714 (32.4% of total investment)
- Monthly Rental Income: £9,850
- Net Profit (Monthly): £1,687.31
- Annual Net Profit: £20,248
- Return Annualised: 2.0%
This analysis shows that we can only pull out 32.4% of the invested capital upon refinancing, significantly below our 70% target. Although the project offers a positive cash flow and increases the asset base, the inability to recover a substantial portion of the invested capital limits our flexibility for future investments.
Conclusion
While the suburban East London development offers potential for generating rental income and contributing to long-term portfolio growth, it does not align with our stringent investment criteria:
- The return from a buy-to-develop-and-sell perspective is below our 10% threshold.
- The refinancing option does not allow us to pull out the desired 70% of our invested capital.
Given these factors, we believe that our capital and resources would be better allocated to opportunities that more closely match our strategic goals and provide greater financial flexibility. We remain committed to pursuing investments that meet our high standards for return and capital efficiency, ensuring the continued growth and success of our portfolio.
We will be reworking the numbers and may consider making an offer on just one of the flats.