Why the best refurbishments don’t just add value
Jonathan Rubins on why refurbishment should focus on making properties easier to refinance and sell, not just increasing value.
Most of us have a cupboard somewhere at home that’s full of things we were convinced would come in useful one day.
Mine contains enough spare cables to wire a small office and a collection of mystery screws I’ve kept despite having no idea what they belong to.
Every so often, I open the door, reassure myself they’ll probably prove useful one day, and nonchalantly close it again.
It’s a triumph of optimism over practicality, and property investors can occasionally find themselves approaching refurbishment in a similar fashion.
Refurbishment has traditionally been judged by one question: how much value does it add? That’s still important, but I don’t think it’s the only question investors should be asking.
I’m just not convinced it’s the be-all and end-all. I think a better question is whether the work being carried out leaves the property in a stronger position when somebody else has to make an important decision about it.
That decision may come from a buyer comparing your property with several similar homes on the market. Equally, it might be made by a surveyor deciding whether the valuation is justified, or by a lender assessing a refinance onto longer-term funding.
There is a subtle but important difference between adding value and removing reasons for somebody to say no. It’s particularly relevant in a market where buyers have considerably more choice than they have enjoyed for many years.
Rightmove has recently reported that the number of homes coming to market has reached a 10-year high, giving purchasers a far broader selection of properties before committing to a purchase. When choice expands, expectations tend to rise with it.
A property no longer has to be poor for somebody to reject it. It simply has to look slightly less appealing than the next one they view.
The same principle applies to refinancing, although the questions naturally become a little different. From a lender’s perspective, the discussion is rarely limited to whether a refurbishment has increased the value of an asset, because value is only one part of the picture.
Just as important is whether the work has reduced uncertainty and created a proposition that stands up to scrutiny.
Does the property comfortably support the proposed exit? Does its condition justify the valuation? Will the next lender have confidence in the asset they’re being asked to finance?
Government statistics show that around 87% of new homes in England and Wales now achieve an Energy Performance Certificate (EPC) rating of A or B, creating an ever-wider contrast with older housing stock that may require further investment before reaching comparable standards.
That does not simply make older properties less desirable, nor does it suggest every investor should embark on a major refurbishment programme. It does, however, place greater importance on where refurbishment budgets will have the greatest commercial impact.
Those are exactly the conversations we’ve found ourselves having more frequently at Alternative Bridging. Rather than viewing acquisition, refurbishment, development exit and longer-term funding as separate stages, we’ve always believed they work best when considered as part of one continuous strategy, with each decision influencing the next.
It’s also why flexibility has become such an important part of the funding conversation. Projects rarely progress exactly as they were drawn up on day one, and borrowers often benefit from facilities that can adapt if sales take longer, refinancing opportunities change or an asset needs a little more time before reaching its full potential.
A beautifully designed kitchen will always photograph well. Equally, improving insulation, replacing an ageing heating system, resolving maintenance issues or completing outstanding compliance works may ultimately do more to strengthen a refinance than another premium finish that adds very little beyond first impressions.
None of those improvements are particularly glamorous. They are unlikely to dominate an estate agent’s marketing brochure. They do, however, help create confidence, which is often what keeps transactions moving.
The strongest projects are rarely defined by a single transaction. Plans evolve and exit strategies sometimes need to adapt, which is why we’ve always believed funding should support the whole life of a project rather than simply getting it over the first finish line.
That could be the biggest opportunity for brokers. The discussion shouldn’t end once the refurbishment has been funded. It should focus on whether today’s decisions will make tomorrow’s refinance or disposal easier.
Perhaps that has become the real measure of a successful refurbishment. Not simply the value it adds, but how effectively it prepares a property for whatever comes next.
Jonathan Rubins is director and chief commercial officer at Alternative Bridging Corporation
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