NEW BUILD OPPORTUNITIES
I have spent the last year or so warning landlords & especially newbie landlords against the perils of being caught by the allure of off-plan marketers selling sexy new city centre properties.
It therefore might appear hypocritical to now promote the concept of buying new build property. However, there are circumstances when new residential properties sometimes represent ideal investments. They have certain obvious advantages to a landlord in that once the ‘snagging’ issues are sorted out a new build property investment should be ready to rent out immediately without any time consuming renovation work or voids period.
There is no doubt, with the increase of interest rates and now the credit crunch the residential property market is slowing, particularly outside the south-east and London. The latest figures from the FT show 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 rise but at a slowing rate. The biggest falls were experienced in the North & East Midlands with the latter registering a 2.5% fall during this 3 month period.
One of the biggest losers in a slowing market are house builders. One only has to witness the way share valuations of the major UK builders have fallen off a cliff in recent months. At the time of writing shares in Barrat Developments one of the UK’s leading house builders are down over 50% from their year high of almost £13 and are now hovering at just over £5. The market obviously expects a severe 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 support 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 their loans and marketing costs. 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. This is because they need to finish the whole development and are unable to phase construction and thereby match sales to production.
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A landlord’s opportunity
A down turn in the residential market could therefore represent a real buying opportunity for landlords who are prepared to negotiate hard with housing developers for a deal. A developer is particularly receptive to a landlord’s advances where they only have a small number of units remaining within a development and need to sell so that 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 act as 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 doing it themselves a landlord is not paying vulture introducer fees and charges and also that the landlord can ensure that they are obtaining the properties at a genuine discount to the market price.
Small builders particularly vulnerable
As well as the larger house builders, landlords should be aware of the numerous small local builders that 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 up to survive a down turn. Therefore, if the property remains unsold for more than a couple of months, these developers are under serious financial pressure. This means that 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 an old sports injury of mine how he managed to pick up a 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 new 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 over the last year by the over supply and over valuation of some new build developments and have therefore began to apply a very cautious lending policy in respect of these buy-to-let investment properties.
Large builders or developers often offer incentives including a ‘cashback’ or the payment of a deposit to encourage the purchase of new builds. Problems can occur with builder’s deposits because the discount set relates to the builder’s valuation of the property, not an independent surveyor’s valuation. Most mortgage lenders will offer funding based on either the purchase price or valuation, whichever is the lowest. A small number of lenders will accept a builder’s deposit but it is essential 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 concept 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 in some cases to check their exposure to lending in particular areas of the country. Some lenders are also asking borrowers to put down larger deposits particularly on flats of between 25% and 30%, against a market norm of 15%.
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My advice for landlords over the coming months is to watch their local housing market very carefully for newly completed properties that are sticking. In this case landlords shouldn’t feel shy about making seriously below market value offers. Where they have their finance in place landlords may just be pleasantly surprised when the developer decides to “bite their hand off”.
Hawkeye – a unique perspective on Property Investing.