The Sandars Maltings building is a piece of history with a strong investment case for its future. We’re proud to introduce this as our first ‘higher-yielding’ property at 5.89% dividend yield. It represents an institutional grade investment opportunity, comprising 42 flats in a Grade II listed converted mill in Gainsborough.
The property was acquired at a 22% discount to its RICS break-up value, 7% discount to its RICS investment value (bulk transaction price), and is 60% geared for enhanced returns.
This truly compelling investment case is underpinned by four factors:
- We’re purchasing 42 of the 48 flats in this Sandars Maltings converted mill, plus the Freehold for the entire building. There is a significant discount reflected in the purchase price for these apartments, which we secured directly from the receiver for £1,820,000 – versus the RICS break-up value of £2,320,000, and RICS investment value of £1,950,000 (which reflects a bulk sale discount). Even using the lower valuation of £1,950,000 for prudence, investors benefit from an initial 7% of capital growth which is amplified to over 14% due to the effects of gearing. Owing to the number of units involved, we’ve opted to gear this property at a slightly higher level of 60% LTV
- This investment is high-yielding, generating a dividend yield of 5.89% due to the discount secured on the purchase price, gearing amplifying income, and the fact that rental yields tend to be higher in areas outside major cities
- The property also has attractive ongoing capital growth prospects. Savills, in their forecast for house price growth by region, project the East Midlands to appreciate 5% per annum over the next 2 years, and 3% in the 2 years thereafter. Gearing allows significant outperformance to this market growth, however investors should note that gearing amplifies losses if prices fall
- Ignoring break-up value and rental growth for prudence, we expect investors to earn 5 year total returns of over 65% after costs and fees – which is 13% annualised – split almost evenly between income and capital growth
Our investment comprises 42 flats, and the freehold interest of all 48 flats in the Sandars Maltings converted mill – a riverside location in the historic market town of Gainsborough, in the East Midlands. Of the 48 flats, six have already been sold off on long leases, giving us benefit of the ground rent. The remaining 42 are directly owned within the freehold.
Sandars Maltings is being managed by an appointed receiver, following repossession by a lending bank. The receiver was keen to achieve certainty of sale to an experienced operator, and with a simple transaction, rejecting higher bids in favour of our cash offer, for £1,820,000. The block has an RICS certified valuation of £1,950,000. This valuation estimate is for the block, sold in a single transaction. The surveyor also states an aggregate Vacant Possession valuation of £2,320,000. This higher valuation represents the ‘break-up’ value of the block.
As appropriate, we have calculated a purchase discount of 7% using the lower of these two valuations, at £1,950,000. Owing to the effects of gearing, investors will see capital gain of 14% if the property valuation remains unchanged over the next 3 months, at which point a valuation is given by an RICS Chartered Surveyor. You can read more about our revaluation process in the “‘Resale’ opportunities” section of this page.
This property offers a very high dividend yield of 5.89%. This is partly due to the discount secured in the purchase price, and partly due to the fact that rental yields tend to be higher in areas outside London and other major cities. This figure is net of mortgage interest payments, purchase costs, furnishings, remedial cosmetic works, forecast maintenance, annual voids, corporate taxation and all fees. In addition, the gearing has the effect of increasing dividend yield, since the interest rate on the mortgage, at 4.50%, is substantially lower than the net rent.
Gainsborough is a cultural hub with a history that stretches back more than 1000 years. It’s located roughly 45 miles East of Sheffield, and 55 miles North East of Nottingham, in the East Midlands region. The well-regarded research team at Savills estimate capital growth for the region at 5% per annum over the next 2 years, and 3% in the 2 years thereafter.
Taking into account Savills’ estimated capital growth for the region and the 7% discount to the RICS investment value, we expect investors to earn 5 year total returns of 65% 1, or 13% annualised, after costs and fees.
Since the Savills forecasts were published, the government has announced a long-term economic plan for the Midlands that includes £5.2 billion of investment into transport infrastructure and the aim to create 300,000 extra jobs by 2030.
1 Savills’ forecast extends only four years (2016: 5%, 2017: 5%, 2018: 3%, 2019: 3%). When calculating a 5 year forecast return, we have assumed growth in the fifth year equal to growth in the fourth year, i.e. 3% for 2020.