Buying Apartments and Flats
Apartments rule the BTL sector
Apartments and flats have been the investment of choice for many investors since the BTL mortgage initiative started in 1997. One and two bedroom apartments are seen as ideal accommodation for the mainstream type of tenant. These small units have met a large portion of the demand for couples and individual tenants.
Their key attraction is they are part of a block. This typically brings shared maintenance and takes away the additional management responsibility for the repair of common parts, such as roofs, entrance halls and gardens. The responsibility is taken from the landlord and placed with a management company. For many landlords, this ‘less hassle’ factor has played a big part in them buying an apartment, opposed to buying a house.
Those investors considering buying into the apartment block ‘easy life’ should be warned however. The less maintenance lifestyle does come with a downside – less maintenance on a rental property comes with a cost. Apartment blocks charge a service charge, and these can be high.
Any service charges needs to be taken into account as part of any property investment appraisal. They can have a significant effect on a property investor’s overall returns.
Types of apartments and flats
Those landlords investing in London will most probably end up buying an apartment, same goes for many UK city locations. The rise of the apartment can seen in city centre locations across the country. More than 50% of inner Londoners now live in apartments.
There are a number of different types of apartments:
• mansion blocks
• purpose built blocks
• ex local authority
• new build
Apartments in 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.
Apartments in mansion blocks
These architectural gems date from the Edwardian era. They are mainly confined to central London. These apartment 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 get the historic features, and they are now unlikely to date in style, unlike many of the new-build blocks that are springing up flaunting this seasons architectural fashions. Mansion blocks are much beloved by a discerning tenants. The draw back to these blocks are the often high service charges. Many have centrally supplied heating, water and sometimes a residential porter.
Apartments in purpose built blocks
Purpose built apartments have been developed for owner-occupiers from the 1950’s onwards. Ispired by the Modernist Europeans they often have a slightly utilitarian look. However, the older blocks should benefit from ‘Parker Morris’ standards and therefore have fairly spacious rooms. Interior layouts can often be altered slightly to make better use of what is typically a generous space, but property investors will need to check the lease to ensure that alterations are 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 failing reinforced concrete building frames. Management charges are typically less than in the Mansion Houses.
Ex Local Authority flats
Ex-local authority flats are comparitively cheaper to buy. Note I’m calling them flats and not apartments – it sums up the snobbery differential between those blocks built for council tenants and not owner occupiers. Ex-local authority flats typically come with at least a 10% discount to private purpose built units, although particularly in Central London 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 buying.
New ‘Designer’ Apartments
I call these ‘designer’ because they are often sold with a ‘lifestyle’. City centres across the UK have seen many of these new apartments spring up fuelled by BTL pounds. They are temples to ‘aspirational’ living. They come with a glossy brochure showing glamourous couples sipping champagne, and a long list of the specifications – state of the art power showers, granite worktops and gizmos. The designer apartment comes at a cost. Normally a 10-20% premium to any equivalent 2nd hand property in the neighbourhood. These apartment often have the option of underground parking – a provision that is a big selling point to tenants. My first warning to landlords, is don’t get too sucked in by the interior specifications, though these are nice, they will depreciate. A shower head will tarnish and degrade, a kitchen cupboard will scratch and the whole fashionable look of the interior will date. I’d advise avoiding any interiors that are too out there and of the moment. These will date quickest. You don’t want to be trying to let it in five years time only to have a tenant say how unfashionable it all looks. Far more important than specifications is space. How big is the thing? Get the exact square footage and use that for making your comparables on price. Property is valued on square feet and not the style of your taps!
The new designer apartment sector has always been a flood with BTL investors. They are a product that many landlords like. They are easy to source, easy to buy, easy to manage and when new, easy to let. However, some of these blocks have suffered over the past decade from an over-supply. Some UK city’s saw many landlords struggling to let these apartments, suffering from long rental voids or lower rents than they had forecast. Though this situation appears to have improved in recent years because of population growth and unaffordability in the property market increasing tenant numbers in the private rented sector.
I’d still advise landlords to check their local market. Be wary of buying in areas where a lot of new building could see over-supply, and don’t get sucked in by the glossy brochures. Increasingly, these new build apartment blocks are more likely to feature a student drinking a can of Carling on the balcony than a glamorous couple sipping champagne. Nothing against students, but landlords don’t want to be paying champagne prices for beer rents. Some of these new build apartment blocks have ended up as BTL ghettos renting to students and tenants on benefits. Do your research and tread carefully.
Alongside high purchase costs, new build apartments also come with high service charges, so as ever, factor these into your investment return calculations.
The size of an apartment
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!
The trend in apartment living
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.