I would usually tell landlords & especially newbie landlords to steer clear of the perils of being caught by the allure of off-plan marketers selling sexy new city centre properties.
However, you will find circumstances when new residential properties sometimes represent ideal investments. They’ve certain obvious advantages to a landlord in that when the’snagging’issues are sorted out a brand new build property investment should prepare yourself to rent out immediately without the time intensive renovation work or voids period.
There’s without doubt, with the increase of interest rates and now the credit crunch the residential property market is slowing, particularly outside the south-east and London. The most recent figures from the Financial Times show that prices actually fell in many areas of the nation between June and September; the exceptions being London and the South where prices have continued to go up but at a slowing rate. The biggest falls were experienced in the North & East Midlands with the latter registering a 2.5% fall during this 3 month period.
One of the biggest losers in a slowing market are your house builders. One only needs to witness the way in which share valuations of the major UK builders have fallen off a cliff in recent months. During the time of writing shares in Barratt Developments one of the UK’s leading house builders are down over 50% from their year a lot of almost £13 and are actually hovering at just over £5. The market obviously expects a severe slowdown.
This slump in activity might actually represent a buying opportunity, particularly for sharp-eyed landlords. House builders become desperate to shift units once the housing market slows. This is because the developers have to support their large overheads from dwindling sales revenue. The longer a development goes unsold the more their costs rise even if the development has been completed as your house builder continues to spend money to pay interest on their loans and marketing costs. Santa Rosalia Lake & Life Resort This all means profit margins are continuously eroded the longer the development remains unsold. Developers are particularly susceptible to a decelerate when they’re building apartment developments. This is because they should finish the complete development and cannot phase construction and thereby match sales to production.
A Landlord’s Opportunity
A down turn in the residential market could therefore represent a real buying chance for landlords that are prepared to negotiate hard with housing developers for a deal. A developer is particularly receptive to a landlord’s advances where they just have a small number of units remaining inside a development and need to market so they can move off site to the next development. Landlord’s who are able to affect multiple purchases either independently or club together and then behave as a syndicate have been in particularly strong positions. If this all sound such as the investment clubs of old then it is. The difference is that by doing it themselves a landlord isn’t paying vulture introducer fees and charges and also that the landlord can ensure that they’re obtaining the properties at an authentic discount to the market price.
Small builders particularly vulnerable
As well as the more expensive house builders, landlords should know about the numerous small local builders which have often chanced their arm and experienced property developing without having to be fully conscious of the economics. These developers often do not have the financial back as much as survive a down turn. Therefore, if the property remains unsold for greater than a couple of months, these developers are under serious financial pressure. Which means that a landlord is in a fantastic position to make a seriously below market value offer. My physiotherapist was only remarking the other day, as he was pummelling a vintage sports injury of mine, how he managed to get a brand new build really cheaply just because the builder had over extended themselves and was desperate to sell.
New Builds & Buy-to-let Finance
One potential stumbling point for a landlord trying to get a brand new build residential investment bargain is being able to secure a buy-to-let mortgage on these properties. Some buy-to-let lenders have been spooked over the last year by the over supply and over valuation of some new build developments and have therefore began to use a very cautious lending policy according of the buy-to-let investment properties.
Large builders or developers often offer incentives including a’cash-back’or the payment of a deposit to encourage the purchase of new builds. Problems can occur with builder’s deposits as the discount set pertains to the builder’s valuation of the property, not an independent surveyor’s valuation. Most mortgage lenders will provide the funding centered on either the cost or valuation, whichever is the lowest. A small number of lenders need a builder’s deposit however it is essential to reiterate that the valuation set by the builder must match with that set by the independent valuer.
Those few mortgage lenders, who do accept builder’s deposits, is only going to accept deposits as high as 5% of the property valuation and / or insist that the borrower puts down a 15% deposit themselves. Therefore the thought of purchasing property without money down has been redundant for sometime.
Issues concerning new build valuation have lead lenders to scrutinise very closely the survey process and sometimes to test their contact with lending specifically aspects of the country. Some lenders are also asking borrowers to pay larger deposits particularly on flats of between 25% and 30%, against a market norm of 15%.
My advice for landlords within the coming months is to view their local housing market cautiously for newly completed properties which can be sticking. In this instance landlords shouldn’t feel shy about making seriously below market value offers. Where they have their finance set up landlords may just be pleasantly surprised once the developer decides to “bite their hand off “.