I would usually tell landlords & especially newbie landlords to steer clear of the perils to be 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 have certain obvious advantages to a landlord in that when the’snagging’issues are sorted out a new build property investment should be ready to rent out immediately without any time consuming renovation work or voids period.
There’s no doubt, with the increase of interest rates and now the credit crunch the residential property market is slowing, particularly beyond your south-east and London. The latest figures from the Financial Times reveal that prices actually fell in most areas of the country 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 in this 3 month period.
Among the biggest losers in a slowing market are the home builders. One only needs to witness the way share valuations of the major UK builders have fallen off a cliff in recent months. At the time of writing shares in Barratt Developments one of the UK’s leading house builders are down over 50% from their year high of almost £13 and are now hovering just over £5. The marketplace obviously expects a severe slowdown.
This slump in activity may actually represent a buying opportunity, particularly for sharp-eyed landlords. House builders become desperate to shift units when the housing market slows. The reason being the developers have to support their large overheads from dwindling sales revenue. The longer a development goes unsold the more their costs rise even though the development has been completed as the home builder continues to spend money to cover interest on the 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 vulnerable to a slow down when they’re building apartment developments. The reason being 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 an actual buying chance for landlords who are ready to negotiate hard with housing developers for a deal. A developer is specially receptive to a landlord’s advances where they simply have a small number of units remaining inside a development and need to market so that they’ll move off site to another location development. Landlord’s who have the ability to affect multiple purchases either on their own or club together and then behave as a syndicate come in particularly strong positions. If this all sound like the investment clubs of old then it is. The difference is that by carrying it out themselves a landlord isn’t paying vulture introducer fees and charges and also that the landlord can ensure that they are acquiring the properties at an authentic discount to industry price.
Small builders particularly vulnerable
As well as the larger house builders, landlords should know about the numerous small local builders that have often chanced their arm and got into property developing without being fully aware of the economics. These developers often do not need the financial back up to survive a down turn. Therefore, if the property remains unsold for more than a couple of weeks, these developers are under serious financial pressure. This means that a landlord is in a fantastic position to make a seriously below market value offer. My physiotherapist was just remarking the other day, as he was pummelling a vintage sports injury of mine, how he managed to pick up a new build really cheaply simply 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 pick up a new build residential investment bargain is being able to secure a buy-to-let mortgage on these properties. Some buy-to-let lenders have already been spooked during the last year by the over supply and over valuation of some new build developments and have therefore began to utilize an extremely cautious lending policy according of these 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 funding centered on either the cost or valuation, whichever could be the lowest. A small number of lenders will accept a builder’s deposit nonetheless 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, will simply accept deposits of up to 5% of the property valuation and / or insist that the borrower puts down a 15% deposit themselves. Therefore the concept of purchasing property with no money down has been redundant for sometime.
Issues concerning new build valuation have lead lenders to scrutinise very closely the survey process and in some cases to test their exposure to lending particularly regions of the country. Some lenders may also be asking borrowers to deposit 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 that are sticking. In this case landlords shouldn’t feel shy about making seriously below market value offers. Where they have their finance in position landlords that are happily surprised when the developer decides to “bite their hand off “.