does it add up

After the meeting with officers Edwina and Mike yesterday at Cecil Square, Margate I though I would stick my accountant hat on to see if the figures for the Royal Sands development add up for Cardy Construction.

As a prelude to this I would just say the building trade and therefore the saleability of the units have change greatly over the last few years and it is apparent that the new development, nearing completion, along the way is suffering as only 2 units so far have been reserved leaving a cash flow issue for that developer.

It is also true that hotels nowadays aren't being built by hoteliers but rather leased from a service company so effectively they are only tenanted and the proposed 60 bed 3* hotel being suggested is likely to go the same way. Its future value is more likely to be determined by its annual lease times 10 than a sale price. The same is likely to occur with any restaurants and coffee bars.

So lets do the sums 107 apartments @ average £300K equals £32M + hotel   + A3 units

assuming to build the hotel and fit out would cost around £5M you would look to a value of £7M to turn a profit, so 60 rooms @ £90 per night with occupancy of 78% equals turnover for rooms @ £1.49M less overheads @ 70%. this 70% would include annual lease of £700K as that's normally how hoteliers work in today's climate. The same would apply to the A3 use. That would mean the site fully developed would have a value of approximately £40-£42M. That on the face of it would be advantageous to Cardy who would expect to spend a further £20M building it all.

This is only half the story as cash flow would be their biggest problem as it is with most developers. Currently Cardy are out of pocket by £1.5M (give or take) and they have yet to pay Keegan what he thinks he deserves and the cost to TDC which in 2012 was just over £3M and is likely to have risen to just under £4m with the latest valuation.

So assuming the saleable element is the 107 apartments we have  £32M less SFP cost (£7M) + £4M (TDC) less build costs (assuming no over runs) makes a margin of £1M.

Assuming again Cardy transfer the A3 and hotel into a service company they will (assuming they do lease the units) have an ongoing cash flow of +£1M per year and not to be sniffed at.

There is however oen more issue as TDC officers understand they have a duty of care which is to divulge any issues that impact on the saleability of the build. In 2008 £900K was spend on cliff works and in 2012 a further inspection was made which had a number of recommendations none of which were started (but I bet the work was costed) As these recommendations are outstanding still the cost needs to be paid and as one of those was the painting had to be redone this is likely to be a future maintenance cost payable by the residents of the apartment owners in with their service charges.

I think that the saleability of apartments depend greatly on the ongoing service charges and this coupled with the damaging sea air would cause a lot of people to shy away from buying causing ongoing cashflow issues.

I am told in Oostende in Belgium there are many units like this already built were the developer has given away apartments to the builders because they cannot afford to pay the builder so they receive a benefit in kind.

Further if painting the cliff becomes a regular maintenance issue we all remember the scaffolding erected in 2008 and the moths of work carried out. On an open site that is a pain however imagine this in a 13ft access road which is the only access for deliveries, car parking and refuse removal.