We recently took a stand at the Property Investor Show at ExCel in the UK and were amazed at the number of exhibitors ‘flogging’ (there is no more appropriate word) new build and off-plan apartments… and even more amazed by the large numbers of people seemingly interested in buying them. It was as if 2008 had never happened!
I, like many people, bought a large number of off plan apartments between 2001 and 2007… before the crash. These all looked very nice in the glossy brochures with their designer kitchens and contemporary bathrooms and they are no doubt very nice to live in. But, as an investment, they generally prove to be very poor.
So why did I do it? I admit, like many people. I was seduced by the pretty pictures, the “20% off-plan discount” and the idea of the properties shooting up in value by the time they were complete. We all make mistakes. And mistakes in property can be very expensive. Hopefully, I have learned by mine!
One of the things I have learned is buying property in this manner is pure speculation. You have no control over what the market will do or what the developers will do once they have your deposit. Believe me I know of lots who went bust… and some who just disappeared to the Costa Del Crime. You may be fortunate and be able to flip it at just the right time, but if not, there will be many others trying to do the same thing, and market forces will seriously squeeze your profit margins.
So if you can’t sell it for a profit you will be stuck with renting the property and…here’s the rub – despite the publicised yields, the developers will assure you can achieve, the truth is the only way you will make money from them is if the property market rises significantly and you are able to sell at a profit. If you have to rent then, the norm is that you will make very little money and, in many cases, you will actually be subsidising your mortgage payments.
Here’s what people who are seduced by the pretty pictures do not take into account.
1.You pay a premium for a bright shiny new apartment. A year down the line and you will be lucky to sell it for what you paid for it (even allowing for that alleged “discount”). You will be competing with other pre-owned properties on the market, with the latest new build apartment block that came along 6 months after yours and potentially with many other investors all trying to sell identikit flats in the same building as you.
Suddenly, with scuffed walls, mounds of personal items everywhere (because these flats never have enough storage space), the agents’ photos don’t look so appealing anymore. Even worse, if the pattern of the noughties repeats itself (which it inevitably will), there will be lots of repossessions in some buildings as amateur landlords who didn’t crunch their numbers properly realize they are losing money every month and simply hand back the keys. That will drastically undermine the value of your property. I know this from bitter experience. Out of the 16 properties I bought off plan 8-13 years ago, two are still worth significantly less than I paid for them, and the rest are worth about what I paid for them – and all mine were purchased off plan prior to the top of the market in 2007. That’s not an issue for me as don’t plan to sell but, as you will see below, what is an issue is the low yields they produce – a big problem if you have high service charges and mortgage rates increase.
- Even the gross yields you could possibly make if everything goes swimmingly aren’t good; typically 6% in Manchester and much lower in London and the South East. Compare that with yields from an HMO which can often be as high as 18% gross.
- To attract the right tenants you have to furnish it well and keep it well maintained. That will cost you several thousand pounds to start with and at least a few hundred a year after the first two years as you replace worn out and damaged items.
- Fact: rents will not be what you were told they would be. The agents weren’t lying. They probably gave you realistic rental appraisals. But the market moves and when a new building is ready you can guarantee that a large percentage of those flats will come flooding onto the rental market at the same time. Competition amongst landlords to get their flats rented will force the rents down and keep them suppressed for a while at least. Also, don’t assume when crunching your numbers that rents increase every year. They may do so over time but very gradually and may even go down for a few years.
- Young professional tenants, whilst generally low maintenance, tend to move around; even more so if you have bought in a new, fashionable building and attracted the sort of tenant who always wants to have the “right” address. You will have voids. Even just 5 weeks a year reduces your gross yield by 10%. Compare that to renting a house to a family that wants to make it home – they will normally stay for years thus increasing your net rental income.
- Ground rents. New build flats are always purchased on a leasehold basis. You have no choice but to pay the ground rent to the freeholder and although a typical charge of £300 a year isn’t the end of the world, proportionately, it can still significantly reduce your return. It means June and December (the times of the year these bills all come in) can make cash flow very tight.
- But by far the biggest problem with new build flats is the service charge. It’s a license for the management company to print money – e.g. £10 to change a light bulb – and there is nothing you can do about it unless you want to gather all leaseholders together to take over the management of the block.
Most service charges for even quite basic bocks now run to £90-£130 a month. And in one city centre development in Birmingham, I rent a flat out for £850 a month. It’s a very nice flat: large rooms, balcony with great views, a gym, concierge and a fantastic waterfall in reception. But the service charge is a massive £290pm, reducing the net monthly income to £590. The mortgage, by the way, is north of £1000 a month. And that, dear reader, is why you should never, ever invest in a flat that has a waterfall in reception.
So, when it comes to property investment, pretty new build properties rarely make for an attractive investment. The only conceivable reason for buying one is that
- a) you are a Chinese Billionaire and are just sitting on it expecting it to increase in value at some point or
- b) you believe they are easier to look after (though if you use a managing agent that is largely irrelevant).
But if after all I have said the idea still appeals to you for some reason then I suggest that you look to buy pre-owned at a sensible price in a building that already has a proven rental demand.
Make sure you carefully check the service charge ground rent and build them into your figures. It’s not impossible to find a good investment but they are few and far between.
At The House Crowd we prefer to focus on properties that we know will produce cash flow. They are often not very pretty properties – typically terraced houses in at the lower end of the market, but they will put money in your pocket and for me represent a far wiser investment. After all, you don’t choose which bank to put your money in by how pretty the bank teller is. Or maybe you do, in which case, call me… I have a lovely penthouse apartment just for you with great views over Birmingham City Centre… and a fantastic waterfall in reception!
A very useful article. It seems only the Chinese billionaire are making money out of property nowadays. Is that because of the exchange rates?