If you’re a first time landlord or an experienced investor, think long and hard before adding new build properties to your portfolio. Here are some of the pitfalls:
1. Developers Premium
When you buy a new build property, a developer is making a substantial profit. They will only have embarked on the project if they knew they could make a decent return and they will have set the price point accordingly. You are paying for all of the marketing, the trouble that they have gone to building, designing and fitting out the property and developers know that they can charge a premium for something that is brand new.
2. The discount illusion
In recent years, new builds in London have been snapped up at the asking price. As the market calms, or in other parts of the UK, you would be quite rightly tempted to make an offer, or the developer may entice you with a discount. We all love a bargain and the offer of a discount appeals to our inner bargain hunter. It is highly likely that the developer has a very clear idea of how much he is prepared to sell the property for. The original asking price was probably substantially more than this and the discount you are being offered just takes the price to where he is prepared to sell.
3. Speculative valuations
One of the challenges with new builds is that there may be no similar properties or no new builds have been sold in the area, perhaps because most of the local housing stock is considerably older. This makes it difficult to find reasonable comparative properties so valuations are often somewhat speculative and lean towards the developer’s requirements. Pre credit crunch, valuers were sometimes in cahoots with developers, producing valuations that met the needs of the developer’s business plan. In some cases properties plunged in value in the following years. Thankfully regulation no longer allows this. My point is that valuations of new builds can be optimistic and unreliable.
4. The temptation of the shiny and new
The show flat is selling you a shiny new dream that can be very persuasive for a new investor. Packages like guaranteed rents can also make new builds sound like the prefect investment that will require minimum management. There’s no doubt that renting newly built or refurbished properties can help attract good quality working tenants that may be more likely to be easy to manage. But any property can look shiny and new when refurbished, it doesn’t have to be a new build. New builds can also age with time and look out of fashion.
5. No opportunity to add value
The key problem with buying new build as an investment strategy is that there is no opportunity to add value. If you buy a run down property, you can refurbish and extend it and increase its value. You can then refinance it and use the capital that you raise to purchase more property. That is not possible with a new build, you will have purchased it at top dollar and will need to wait for the market to rise substantially before you can release any capital.
6. Vulnerable in a falling market
Having purchased your new build property at a premium price, your strategy is now going to be vulnerable to a fall in house prices. Older properties with character are much more likely to hold their value as there will always be a restricted number of them and they are always in demand.
7. Saturation of rental properties
Blocks of new flats are often marketed to UK and international investors. That means that a substantial number of properties will flood onto the rental market when they are completed. So tenants will be able to choose between a number of flats on the development, depressing rental values. This is not such a problem in high demand areas like inner London, but in the past has been a problem in cities like Cardiff, Swindon, Sheffield and Leeds. The problem is compounded in newly developed areas where transport links have not been established or there is an assumption that people will use vehicles. Your pool of tenants will be substantially reduced. Generally buying close to good public transport links and areas of shopping, employment and study are key factors for success.
8. Hostage to management charges
The communal areas of the property will be looked after by a management agent who, like the developer, will make money from the flat owners or leaseholders this time through the service charge. You will want any works to be carried out to an excellent standard and for a good price. You may be lucky and get a good management agent, but be warned that being a leaseholder in a new development can be incredibly frustrating and will eat into your rental profits.
9. Delays in completion
You will need to be flexible with your plans as delays in completion are common.
10. Layout Disappointments
The developer may offer flexibility around fixtures and fittings, but in some cases developers will stipulate changes to the original specification which you cannot object to. Obviously they can’t alter the structure of the property or number of bedrooms, but the layout of the kitchen or bathroom could vary.
