I would usually tell landlords & especially newbie landlords to prevent the perils to be caught by the allure of off-plan marketers selling sexy new city centre properties.
However, there are circumstances when new residential properties sometimes represent ideal investments. They have certain obvious advantages to a landlord in that when the’snagging’issues are sorted out a new build property investment should be ready to rent out immediately without the time intensive renovation work or voids period.
There is without doubt, with the increase of interest rates and now the credit crunch the residential property market is slowing, particularly beyond your south-east and London. The most recent figures from the Financial Times show that prices actually fell generally in most areas 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 largest falls were experienced in the North & East Midlands with the latter registering a 2.5% fall in this 3 month period.
Among the biggest losers in a slowing market are your house builders. One only needs to witness the way in which share valuations of the major UK builders have fallen off a cliff in recent months. At the time of writing shares in Barratt Developments one of the UK’s leading house builders are down over 50% from their year most of almost £13 and are actually hovering at just over £5. The marketplace obviously expects a significant slowdown.
This slump in activity could possibly 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 though the development has been completed as your house builder continues to shell 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’re building apartment developments. This is because they have to finish the entire development and are unable to 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 opportunity for landlords that are prepared 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 within a development and need to market so that they’ll move off site to another location development. Landlord’s who are able to affect multiple purchases either by themselves or club together and then act as a syndicate are in particularly strong positions. If this all sound such as 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 that they’re obtaining the properties at a real discount to the marketplace price.
Small builders particularly vulnerable
Along with the bigger house builders, landlords should be aware of the numerous small local builders that have often chanced their arm and experienced property developing without being fully alert to the economics. These developers often do not need the financial back as much as 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 a great position to produce a seriously below market value offer. My physiotherapist was just remarking yesterday, as he was pummelling an old sports injury of mine, how he managed to get a new build really cheaply 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 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 during the last year by the over supply and over valuation of some new build developments and have therefore began to utilize an extremely 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 because the discount set pertains to the builder’s valuation of the property, not an unbiased surveyor’s valuation. Most mortgage lenders will provide funding predicated on either the purchase price or valuation, whichever is the lowest. A few lenders encourage a builder’s deposit but it is essential to reiterate that the valuation set by the builder must match with this set by the independent valuer.
Those few mortgage lenders, who do accept builder’s deposits, will only accept deposits as high as 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 instances to check their experience of lending in particular areas of the country. Some lenders will also be asking borrowers to put down larger deposits particularly on flats of between 25% and 30%, against a market norm of 15%.
My advice for landlords over the coming months is to view their local housing market meticulously for newly completed properties that are sticking. In this case landlords shouldn’t feel shy about making seriously below market value offers. Where they’ve their finance in position landlords might be pleasantly surprised when the developer decides to “bite their hand off “.