Jonathan Samuels, CEO of specialist lender, Octane Capital, believes that whilst refurbishment projects continue to offer some of the strongest value-add opportunities within the property market, investors must ensure they budget appropriately from the outset, with contingency planning often proving the difference between a successful project and one that stalls before completion.
Octane Capital analysed average UK refurbishment costs and typical refurbishment finance costs based on a 12-month project timeline, as well as the required contingency budget to demonstrate the additional capital investors should consider when planning a refurbishment project.
Refurbishment projects continue to provide some of the strongest value-add opportunities available to property investors. Recent research by Octane Capital found that auction properties, in particular, currently offer an average discount of -44.8% compared to wider market values, whilst unmodernised homes continue to present significant opportunities to increase value through renovation and improvement.
However, these opportunities are becoming increasingly scarce. Octane Capital's recent analysis found that the number of unmodernised properties available across England has fallen by -17.1% over the last year, increasing competition amongst investors and placing greater importance on the ability to move quickly when suitable opportunities arise.
As a result, specialist refurbishment finance is playing an increasingly important role in helping investors secure these opportunities. Unlike traditional lending routes, which can often struggle with poor-condition or unmortgageable properties, refurbishment finance provides the speed and flexibility required to both acquire and improve an asset before refinancing or sale.
Whilst refurbishment projects can generate significant value, investors must ensure they fully understand the capital required to execute them successfully.
Octane's analysis shows that the average refurbishment project now costs £76,690, however, refurbishment projects rarely proceed exactly as planned. Hidden structural issues, outdated plumbing and electrics, damp, energy efficiency upgrades, and unforeseen repair works can all increase project costs once work begins.
For this reason, it is recommends investors incorporate a contingency budget when assessing project viability. Based on a contingency allowance of 12.5%, this would mean investors should budget an additional £9,586 on top of the average refurbishment cost, increasing the total project requirement from £76,690 to £86,276.
This additional budget can prove vital in ensuring projects continue to progress smoothly should unforeseen costs arise during the course of refurbishment works, helping investors avoid delays, funding shortfalls, or the risk of projects stalling altogether.
Alongside the refurbishment budget itself, investors should also consider the cost of funding a project. Based on Octane Capital's refurbishment finance example, interest and associated costs over a typical 12-month project amount to £15,886.
These costs include interest, arrangement fees, valuation fees, legal fees, exit fees and inspection costs, highlighting the importance of assessing the full funding requirement before commencing works.
Jonathan Samuels, CEO of Octane Capital, commented:
“Refurbishment remains one of the most effective ways to create value within the property market, whether that's improving a rental asset, increasing energy efficiency, or bringing an outdated property back to market.
At the same time, many of the best opportunities require investors to move quickly, particularly where auction purchases or poor-condition properties are concerned. Access to specialist finance can therefore be crucial in helping secure these opportunities before they are lost to competing buyers.
However, one of the biggest mistakes investors can make is focusing solely on the headline cost of the works themselves. Refurbishment projects rarely progress exactly as planned and unexpected costs are often part and parcel of improving older housing stock, which is why contingency planning is so important.
It's also important that investors assess the wider funding market and compare lenders carefully. Whilst speed and flexibility are often key considerations, factors such as arrangement fees, legal costs and exit fees can all influence the profitability of a project. For example, Octane Capital doesn't charge exit fees, and incentives such as these can help investors maximise profit margins that little bit more once a project is complete.”
