As real estate developers specialising in prime residential property, we understand both the opportunities and challenges of developing complex sites and high-quality interiors. The UK’s enduring appeal in terms of lifestyle, culture and amenities continues to draw a crowd, but for those wanting to put their own personal stamp on a new home, the complexity, red tape and time surrounding planning and construction is often off-putting.
Purchasing a ‘grey box’ property – one that has been finished to a shell, but not fitted out – is a way of creating a happy medium between risk and reward, as well as both developer and buyer benefiting from a number of financial advantages. However, this concept still remains relatively rare in the residential sector.
REDD CEO Russell Smithers discusses the advantages of grey box sales for both buyers and developers with insights from Anna Jassani at leading London law firm Forsters and Henry Smith of real estate agency Henry Smith & Co.
What is a grey box property?
A grey box property is one that is structurally complete, but with no internal fit-out – no non-structural walls or ceilings, and with services capped off on entry to the apartment. It can be an entire house, or an individual apartment within a new development. It bridges the gap between the construction of the building envelope and a fully finished interior.
Purchasing a grey box property means the buyer has carte blanche to determine the final layout of their home, including the number of rooms and their location and function.
In a grey box property, services such as water and electricity are capped off on entry to the property. These are installed during the fit-out phase to suit the buyer’s preferred layout and design.
Advantages for buyers
Here are some of the advantages of grey box sales for buyers:
1. Choose your preferred layout and specification
Buying a grey box property allows the buyer to finish it to their own vision and to suit their individual needs without going through the lengthy planning and structural reconfiguration phases.
Buyers can select their own interior designer, determine the layout and design of rooms, services and amenities, as well as the interior specification and decoration, creating a home that is totally bespoke to them.
2. Sustainability
This has considerable benefits when it comes to sustainability too. Anna Jassani, a residential property lawyer at Forsters, who recently acted for REDD in a grey box sale at their 6 Charles Street development comments “there is a growing client base that is stipulating sustainability as imperative to investment.”
“Negotiating the completion of a prime newbuild apartments at an early stage of build out, so that the buyer can then finish the interiors to their specification rather than removing brand new installations which are not to their taste.”
3. Complete more quickly
Many buyers are put off by the often lengthy process of undertaking their own project, including the time associated with identifying the right property, uncertainty over budgets, negotiating the complex planning system, and complying with rules and regulations surrounding construction. Embarking on a project from a grey box condition acts as a great entry point for buyers wanting to create a bespoke home, but with the whole process taking less than a year.
4. Pay less stamp duty
The price of a grey box property is generally less, as the developer is able to discount the cost of their fit-out, meaning buyers pay less stamp duty. With stamp duty currently as high as 19% for non-UK residents, this represents a considerable saving that can go towards the buyer’s fit-out costs.
5. Inherit the developer’s VAT rating
As a grey box property has not yet been completed, buyers are often able to inherit the developer’s VAT rating for the fit-out stage, which can often be considerably less than the standard 20%, due to lower VAT rates applicable to construction such as 0% for newbuild, or 5% if the property had been vacant for over two years prior to construction.
Henry Smith of Henry Smith & Co, a buying agent specialising in prime central London, explains: “In a challenging market, you have to be creative. We recently secured a prime Mayfair property on behalf of one of our clients, by agreeing special terms for a ‘grey box’ with REDD.
"Taking into account costs for the purchaser and vendor, it became clear this route was equally advantageous for both parties. Our clients offered to complete eight months ahead of the development’s practical completion, allowing a lower purchase price after the fit-out cost was deducted, coupled with a stamp duty saving on this sum. In turn, the vendor benefitted from the early cash flow. Post-completion, the fit out was agreed to be completed by REDD.”
"A ‘grey box’ sounds rather uninspiring, but this could not be further from the truth. By purchasing a blank canvas, our clients were empowered to direct the final specification and layout according to their exact preferences, delivering the ultimate bespoke finish.
"I caught up with my clients a few weeks ago and was delighted to see them still smiling and enjoying the process. The project is now nearing completion and I have no doubt the end result will be an exceptional home, lovingly created by them.”
Advantages for Developers
As well as being beneficial for buyers, the concept of a grey box property has many advantages for developers. These include:
1. Get an early sales receipt
Unlike traditional off-plan sales, which are simply an Agreement to Lease and a deposit that a developer cannot always utilise, a grey box sale involves the completion of the actual lease. This means that the developer will have received the income from the sale of the grey box at the time it is handed over to the buyer, which can be up to a year prior to completion of the rest of the works. This has huge advantages from a funding and IRR perspective.
2. Avoid post-completion changes
One of the biggest bugbears for developers and new residents alike is buyers making changes to their new apartments. This is disruptive to other residents in the building and the sale of unsold units, not to mention wasteful from a material and carbon perspective. Buyers undertaking their own fit-out avoids the risk of this. If the process is well managed, it can also be delivered within the wider development construction programme.
3. Secure off-plan sales
Finally, securing early sales underpins the value of the building, increasing confidence and demand in the market for other buyers.
With several prime central London developments still in planning or the early stages of construction, REDD has a constant pipeline of grey box opportunities. When it comes to the internal fitout, REDD’s project management team can run this process seamlessly using our own tried-and-tested partners, including architects, interior designers and contractors. This gives the buyer the best of both worlds, being able to design their own home, but with a ready-made team on hand to deliver it.
If you would like more information about REDD’s development pipeline, purchasing a grey box property, or to speak to our private client team, please get in touch. Please note, independent financial and tax advice should be sought on each transaction and project.
