"One of the biggest mistakes investors can make is focusing solely on the headline cost of the works themselves"
- Jonathan Samuels - Octane Capital
Refurbishment projects continue to offer some of the strongest value-add opportunities in the property market, but investors who fail to budget properly from the outset risk projects stalling before completion.
That's the view of Jonathan Samuels, chief executive of specialist lender Octane Capital, whose firm has analysed average UK refurbishment costs, typical refurbishment finance costs based on a 12-month project timeline, and the contingency budgets investors should factor in from the start.
Octane Capital's research found that auction properties currently offer an average discount of 44.8% compared to wider market values, while unmodernised homes continue to present opportunities to increase value through renovation.
However, these opportunities are becoming harder to find. The number of unmodernised properties available across England fell by 17.1% over the past year, increasing competition among investors and placing greater importance on the ability to act quickly when suitable assets come to market.
Refurbishment finance is playing a growing role in helping investors move at the required pace. Unlike traditional lending routes, which can struggle with poor-condition or un-mortgageable properties, refurbishment finance offers the speed and flexibility needed to both acquire and improve an asset ahead of refinancing or sale.
Understanding the full capital requirement is essential. Octane's analysis puts the average refurbishment project cost at £76,690, though projects rarely proceed exactly as planned. Hidden structural issues, outdated plumbing and electrics, damp, energy efficiency upgrades, and unforeseen repair works can all push costs higher once work begins.
Octane recommends investors build in a contingency budget when assessing project viability. Based on an allowance of 12.5%, that means setting aside an additional £9,586 on top of the average refurbishment cost, bringing the total project requirement to £86,276. That buffer can prove critical in keeping projects on track when unexpected costs arise, helping investors avoid funding shortfalls or delays.
The cost of finance itself also warrants careful attention. Based on Octane Capital's refurbishment finance example, interest and associated costs over a typical 12-month project come to £15,886, covering interest, arrangement fees, valuation fees, legal fees, exit fees, and inspection costs. Factoring these in before work begins gives a much clearer picture of overall project profitability.
"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," said Samuels.
"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."
