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 fresh build property investment should get ready to rent out immediately without any time consuming 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 away from south-east and London. The newest figures from the Financial Times reveal that prices actually fell in most parts 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 greatest falls were experienced in the North & East Midlands with the latter registering a 2.5% fall in this 3 month period.
One of the biggest losers in a slowing market are your house builders. One only has to witness just how share valuations of the major UK builders have fallen off a cliff in recent months. During the time of writing shares in Barratt Developments among the UK’s leading house builders are down over 50% from their year most of almost £13 and are now hovering just over £5. The marketplace obviously expects a serious slowdown.
This slump in activity may actually represent a buying opportunity, particularly for sharp-eyed landlords. House builders become desperate to shift units once the housing market slows. The reason being the developers have to guide 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 pay out money to pay for 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 susceptible to a slow down when they are building apartment developments. The reason being they should finish the whole 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 opportunity for landlords who’re willing to negotiate hard with housing developers for a deal. A developer is specially receptive to a landlord’s advances where they simply have a few units remaining inside a development and need to market so they can move off site to the next development. Landlord’s who can affect multiple purchases either on their own or club together and then become a syndicate are 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 they are getting the properties at an authentic discount to the marketplace price.
Small builders particularly vulnerable
In addition to 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 having to be fully conscious 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 greater than a couple of weeks, these developers are under serious financial pressure. Which means a landlord is in an excellent 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 fresh 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 fresh build residential investment bargain is to be 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 use 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 unbiased surveyor’s valuation. Most mortgage lenders will provide funding centered on either the purchase price or valuation, whichever is the lowest. A few 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, 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 idea 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 check on their exposure to lending particularly regions of the country. Some lenders will also be 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 cases like this landlords shouldn’t feel shy about making seriously below market value offers. Where they have their finance set up landlords might be happily surprised once the developer decides to “bite their hand off “.