BUYING APARTMENTS

Flats or apartments
Apartments have been the investment of choice for many buy-to-let investors since the initiative started in 1997.  This is because 1 or 2 bed apartments are seen as ideal accommodation for the types of tenant  which comprise a significant part of the demand in the private rental sector.  The advantage for investors of this type of residential investment to a landlord is that apartments are often low maintenance because much of the repair of common parts such as roofs, entrance halls, gardens are carried out by a management company.  In return a landlord pays a service charge.  A landlord needs to ensure that firstly they know what these charges are likely to be when buying an investment property and also that they factor them in to their investment appraisal as they can have a significant effect on an investors overall returns.

If investors are contemplating buying in London then the chances are that they will end up buying an apartment.  This is because over 50% of the population in inner London live in this type of property and therefore the availability is high and also because the price of property is high most investors will be limited to purchasing this type of investment.  There are a number of different types of apartments:

• conversions
• mansion blocks
• purpose built blocks
• ex local authority
• new build

Conversions
These apartments are contained in what were originally most likely large Victorian or Georgian houses.  They frequently offer period features such as large sash windows, ornate ceilings, and fireplaces which is attractive to many tenants.  Their downside is that because of their age, if they are not well looked after there may be niggling problems like damp or poorly maintained common areas.  Watch for poor fitting windows and antiquated heating systems that can make places hard to keep warm.

If you are considering these types of flats, look out for cheaply done conversions, as many of them were done in the 60’s or 70’s to less rigorous building and noise insulation standards.  It may be a good idea to view this type of property in the evening when the prospective neighbours are back from work and you can ‘check out’ just how good the noise insulation really is.  One good thing about these type of apartments is that service charges are fairly low and they are often self-managed rather than having a managing agent.  A word of warning!  Watch out for the Housing Act! Unbelievably some of these flats will soon need to be registered as a House in Multiple Occupation (HMO) with the associated cost of registration.

Mansion blocks
These architectural gems date from the Edwardian era are mainly confined to central London.  These blocks were purpose built for the well healed and therefore shouldn’t suffer from the inadequate build standards that can affect some conversions.  You still off course get the historic features much beloved by some discerning tenants.  The draw back to these blocks are that lifts, centrally supplied heating, water and sometimes a residential porter mean that service charges are high.

Purpose built blocks
These apartments as the name suggests have been built for purpose and therefore space should be reasonably well laid out.  Developed for owner-occupiers from the 1950’s onwards they often have a slightly utilitarian look and are unlikely to win any design awards.  However, they should benefit from ‘Parker Morris’ standards and therefore have fairly spacious rooms.  This can be useful as by modern standards they tend to waste space.  Interior layouts can often be altered slightly to make use of this and provide a more spacious feel.  Property investors will need to check the lease to ensure that this is possible.  Most likely a landlord will need permission from the freeholder who shouldn’t withhold it provided works are carried out in accordance with Building Regulations.  Watch out for faults or maintenance problems like rusty metal windows or even a failing reinforced concrete building frames.  Management charges should be less than the Mansion Houses but as they could have a lift or porter service, they could still be significant.

Ex Local Authority flats
These flats are priced on average with at least a 10% discount to private purpose built units and therefore still represent a potential bargain, although this discount is falling.  Being ex-local authority means that they should be spacious and that common parts are generally clean and well maintained.  Their external appearance will probably be a little municipal, giving away their heritage.  But where they are well managed and have a good location they can be made into a highly desirable let.  Be sure that the lease allows you to sub-let before going too far down the purchase route.

New ‘Designer’ Apartments
I call these ‘designer’ because the people who buy them are through design being sold a ‘lifestyle’.  However, these temples to ‘aspirational’ living, with state of the art power showers, granite worktops and gizmos come at a cost.  Normally 10-15% premiums to any equivalent 2nd hand property.  They do frequently have the option of underground parking which comes with an additional cost.  However, the provision of on-site parking is a big selling point to tenants and is not often available with other types of flats.

The downside for this type of apartment is that a high proportion of these blocks are bought by investors who will all be trying to let at the same time.  This competition and the lack of ability to differentiate means that rents and yields can be ‘soft’ i.e. easily fall.  In addition, the apartments often offer extensive facilities such as gyms, lifts and concierge.  This means that these units often attract a very high service charge.  In addition, the fact that they are often of a contemporary design means that they can very quickly start to date.  Once the design ‘gloss’ starts to fade, then how much space do you really get for your money?

‘The Space Race’
The UK is unusual amongst other real estate markets in that floor areas aren’t readily featured in sales particulars.  Off course it is not difficult to tot up the floor area from the information provided in the sales particulars; but most people don’t bother.  Interestingly, developers are very pre-occupied with floor areas as most of their profit and cost projections are formulated on the basis of cost per ft or sqm.  Why bother?  The main reason is that it is a very useful way of finding out how much space a landlord is getting and whether this represents value for money compared to the alternatives. 

It’s only when a property investor starts doing these calculations that an investor starts to realise how expensive some of these luxury apartments really are. They might look great but when a property investor analyses what space they get and how much it costs an investor begins to appreciate why house building has been such a ‘profitable game’.  Therefore, a property investor should look carefully at the floor area they get and remember that they can always replace a tired kitchen but they can’t make an apartment any larger!

General
The last ten years have been characterised by the rise, quite literally of apartment living.  From low double figures at the start of the decade to over 50% of new completions.  No longer are they seen as vaguely municipal, a poor mans house….. a flat!  Apartments amongst the young ‘aspirational’ and increasingly the ‘empty nesters’ are the ultimate lifestyle accessory.  They offer a pragmatic low maintenance alternative to a house. 

The change in my home town of Nottingham has been dramatic.  Apartment prices have gone from being valued at a discount to houses to now commanding significant premiums, particularly in the right location.  The development industry has responded to investor demand by providing large numbers of ubiquitous units often in city centres.  My personal view as to a preference between houses and flats is that each should be appraised on their own merits.  What property is the most suitable will depend very much on the type of tenant a landlord aims to attract.  I would say that if a landlord is tempted to buy an apartment in one of these new developments. 

A landlord should instead try and select a block without too many units; thus limiting the potential competition from other property investors.  In addition, a landlord should look for a unique selling point (USP) to the development.  A friend has recently bought a flat in a converted convent.  The building is in the centre of Nottingham and was more expensive than some of the new builds and cheaper conversions being thrown up around it.  But, there are only just over 20 units in the block.  The Listed Building also has a chapel with an interior designed by Pugin.  In my view this rarity value will protect it from any potential over supply in the city centre market. 

Alternatively, suburban locations popular with professionals are another good bet for property investors.  Their potential tenant base is a lot larger than a city centre apartment whose main appeal is to the twenty 'something’ and 'well-healed' students.    Surprisingly, many ‘trendy young things’ who a property investor would expect to crave a city pad; are actually quite conservative in their accommodation requirements.  They actually prefer a quiet, leafy location in which to base themselves, probably not dissimilar to where their parents live.    City centre living is fine for a short period, I’ve done it myself.  But most people tire of the attractions of bars, restaurants and relentless noise together with the hard urban landscape.  Unless there is a big downside in the time taken to commute as is the case in the larger conurbations such as London, Birmingham and Manchester.  The compensations of a 10 minute walk to work will only endure for so many years before the quiet and homely comfort of the suburbs beckons.

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