I’d 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 have certain obvious advantages to a landlord in that after the’snagging’issues are sorted out a brand new build property investment should be ready to rent out immediately without any frustrating 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 most recent figures from the Financial Times show that prices actually fell in most elements of the united states between June and September; the exceptions being London and the South where prices have continued to increase 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 needs 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 at just over £5. The marketplace 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. The reason being the developers have to aid their large overheads from dwindling sales revenue. The longer a development goes unsold the more their costs rise even when the development has been completed as your house builder continues to spend 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 vulnerable to a slow down when they are building apartment developments. The reason being they have to finish the entire 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 genuine buying chance for landlords who’re willing to negotiate hard with housing developers for a deal. A developer is particularly receptive to a landlord’s advances where they simply have a small number of units remaining in just a development and need to offer so they can move off site to another location development. Landlord’s who are able to affect multiple purchases either independently or club together and then act as a syndicate have been 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 is not paying vulture introducer fees and charges and also that the landlord can ensure they are obtaining the properties at a genuine discount to the marketplace price.
Small builders particularly vulnerable
In addition to the more expensive house builders, landlords should know about the numerous small local builders which have often chanced their arm and found myself in property developing without having to be fully aware of the economics. These developers often do not have the financial back up to survive a down turn. Therefore, if the property remains unsold for greater than a month or two, these developers are under serious financial pressure. Which means a landlord is in a great position to create a seriously below market value offer. My physiotherapist was only remarking last week, as he was pummelling a classic sports injury of mine, how he managed to pick up 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 pick up 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 now been spooked during the last year by the over supply and over valuation of some new build developments and have therefore began to apply an extremely cautious lending policy according of those 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 relates to the builder’s valuation of the property, not an independent surveyor’s valuation. Most mortgage lenders will provide the funding predicated on either the cost or valuation, whichever may 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 thought of purchasing property without any money down has been redundant for sometime.
Issues associated with new build valuation have lead lenders to scrutinise very closely the survey process and sometimes to check their contact with lending particularly areas of the country. Some lenders will 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 watch their local housing market very carefully 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’ve their finance in place landlords might be happily surprised once the developer decides to “bite their hand off “.