I would usually tell landlords & especially newbie landlords to prevent the perils to be caught by the allure of off-plan marketers selling sexy new city centre properties.
However, you can find circumstances when new residential properties sometimes represent ideal investments. They have certain obvious advantages to a landlord in that after the’snagging’issues are sorted out a fresh build property investment should prepare yourself to rent out immediately without any time intensive renovation work or voids period.
There’s undoubtedly, with the increase of interest rates and now the credit crunch the residential property market is slowing, particularly away from south-east and London. The latest figures from the Financial Times reveal that prices actually fell generally in most parts 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 largest falls were experienced in the North & East Midlands with the latter registering a 2.5% fall during this 3 month period.
One of many biggest losers in a slowing market are the house builders. One only has to witness just how 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 a lot of almost £13 and are now actually hovering just over £5. The marketplace obviously expects an extreme 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. This is because the developers have to aid 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 the house builder continues to shell out money to pay 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 at risk of a decrease when they are building apartment developments. This is because they have to finish the complete development and are unable to 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 prepared to negotiate hard with housing developers for a deal. A developer is very receptive to a landlord’s advances where they only 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 on their own 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 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 a genuine discount to the market price.
Small builders particularly vulnerable
Along with the larger house builders, landlords should be aware of the numerous small local builders which have often chanced their arm and got into property developing without being fully aware of the economics. These developers often do not have the financial back around survive a down turn. Therefore, if the property remains unsold for more than a couple of months, these developers are under serious financial pressure. Which means a landlord is in an excellent position to produce a seriously below market value offer. My physiotherapist was just remarking yesterday, as he was pummelling a classic sports injury of mine, how he managed to get a fresh 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 get a fresh 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 throughout the last year by the over supply and over valuation of some new build developments and have therefore began to utilize a very 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 since the discount set relates to the builder’s valuation of the property, not an independent surveyor’s valuation. Most mortgage lenders will provide the funding based on either the cost or valuation, whichever could be the lowest. A small number of lenders encourage a builder’s deposit nonetheless it is important 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 only accept deposits of up to 5% of the property valuation and / or insist that the borrower puts down a 15% deposit themselves. Therefore the idea of purchasing property with no money down has been redundant for sometime.
Issues relating to new build valuation have lead lenders to scrutinise very closely the survey process and sometimes to test their contact with lending in particular areas 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 watch their local housing market very carefully for newly completed properties that are sticking. In this instance landlords shouldn’t feel shy about making seriously below market value offers. Where they’ve their finance in position landlords that are happily surprised when the developer decides to “bite their hand off “.