Property market gloom throws up incentives for landlords
The gloom surrounding the housing market has caused many potential purchasers to hold back from buying, resulting in sales volumes contracting significantly. This is all hitting house builders hard depressing sales volumes and future profits. We only have to look at the way the share price of the large house builders such as Barratt Developments & Taylor Wimpey have fallen off a cliff to see how bad the market expects things to get.
Despite this property gloom, most builders resist selling at 'silly' prices far below the asking price. Instead they disguise any price reductions by providing incentives to property purchasers and investors.
I decided to have a look at the new housing market and see what types of incentives are available to property investors and where the best deals are in the market. We also ask the question should these incentives be enough to tempt adventurous property investors back into the buy to let market?
The incentives
In recent weeks, there have been reports of discounts on new homes of 30%-plus - particularly in urban centres supposedly crammed with high-rise apartments.
But actually finding bargains on this scale might be difficult. This analysis suggests most builders - at this stage - are simply allowing a bigger margin for haggling over price, and most will look seriously at offers within 5%-10% of the asking price.
However, most are reluctant to entertain price reductions instead preferring to entice purchasers and investor with a range of incentives.
Steven Lees of website Smart New Homes comments that: "there are a lot of incentives out there". The type of incentive will depend on the type of property being sold.
Examples of the incentives developers use are:
* Solicitors fees paid
* Deposit paid on exchange
* Stamp duty paid
* Furnishing packages
* Cash backs
* Discount sales
* Part exchange
* Rent guarantee
How to drive a hard bargain
Many developers will provide a package of these incentives. The other thing landlords need to appreciate is that the type and extent of the incentives being offered even by large national developers will depend on the locality & the specific development. This means in developments where the builders are struggling to sell or only have a few units remaining the incentives are particularly attractive and you as a property investor should be able to drive a hard bargain.
Property investors shouldn't be afraid of negotiating. It's a buyers market out there and developers are in some cases pretty desperate to shift units. The advantage an investor has over a home owner is that because they are not buying a home, they can play developers off against each other for their business. Landlords looking at buying in Reading for instance can express an interest with a number of builders and see which one is prepared to offer the landlord the most attractive incentive to complete.
David Bexon, managing director of Smart New Homes, says:
"House builders are being ever more creative with their incentives, and some of these offers can be a great benefit to buyers, such as 100 per cent part exchange, paying contributions to costs, and the inclusion of all sorts of extras."
The headline news is the return of part exchange, which had been out of favour for several years. The concept here is simple. The developer buys your old home, freeing you to move quickly and secure your new home and cutting out the need for an estate agent. This is obviously attractive in a slow market, particularly for those having trouble selling.
But to use part exchange you must be "upwardly mobile" - your new home must be considerably, usually at least 25 or 30 per cent, more valuable than your present one. The developer will want to sell your house quickly, and so the price on offer may be up to 10 per cent less than the full market value. On the other hand, there are no estate agents' fees, and many people are willing to sacrifice the chance of a few thousand pounds' extra profit to gain a fast, chain-free sale.
Part exchanges are aimed at owner occupiers. However, landlords with an investment property that they are finding difficult to let either because it is in the wrong location, requires updating or are having problems selling may want to consider this as an alternative to trying to sell up completely into a stagnant market. Landlords can potentially use a house builder's keenness to sell their new property on certain developments to unload their investment 'dog'.
The advantage to a property investor is that they get rid of a poor performing property investment relatively easily and replace it with a property that should be highly lettable. In some cases it may even be possible just to transfer a landlords existing buy-to-let mortgage from one property to another without incurring any financial penalties from the btl mortgage lender. A landlord should inquire about the specific details of the buy-to-let mortgage before committing to a property investment.
I would caution against buying an apartment in a city centre. Landlords should instead look at buying small houses in areas of high rental demand.
Guaranteeing a landlord's rent
The other sales incentive that is particularly appealing to a landlord is the rent guarantee. This scheme being run by a number of property developers will guarantee a landlords rental income for a fixed period of time. Taylor Wimpey which owns the Wimpey, Bryant Homes and Laing Home brands to name but a few is offering investors that purchase one of their properties a guaranteed gross rental income of 6% until 2012. This offer is only available on certain development and providing that the landlord uses the nominated letting agent and financial advisor. However, it does insulate a landlord against any void period and 6% gross yield is above the current average. However, a landlord will be hooked into using a nominated letting agent with their management charges likely to be in the order of 12-15% of the gross rent, the resulting net yield is likely to be significantly below this. A landlord purchasing a new property outside a city centre would generally expect it to let well and for their voids to be correspondingly low anyway.
An example of one of the properties being offered with large incentives is a scheme of micro apartments called 'ipads' built by Barratts. The development near Cardiff Bay is being offered with some hefty incentives implying that Barratts are struggling to sell them.
The evidence is that according to a recent report builders may even be succeeding in keeping property investors in the market place by offering these incentives. For the first time in five months, says the journal House Market Report (HMR), demand for new homes from home owners and first time buyers is lower than demand from property investors - though it was widely assumed property investors would quit the market for new homes as soon as prices began to weaken so there is some evidence of property investors being seduced by these deals.
My verdict
Property investors need to be very wary about diving in thinking they have secured a bargain. One thing that property developers won't tell prospective landlords is that new houses tend to be 10-15% more expensive than equivalent 2nd hand properties to start with. This means that any discount will need to be significant to make the figures stack up initially. There are advantages of buying new properties for a landlord, namely the property can be instantly let and should be attractive to professional tenants. However any landlord needs to make sure that they stay focused on the figures and make sure that they have done their investment calculations before committing to anything.
The gloom surrounding the housing market has caused many potential purchasers to hold back from buying, resulting in sales volumes contracting significantly. This is all hitting house builders hard depressing sales volumes and future profits. We only have to look at the way the share price of the large house builders such as Barratt Developments & Taylor Wimpey have fallen off a cliff to see how bad the market expects things to get.
Despite this property gloom, most builders resist selling at 'silly' prices far below the asking price. Instead they disguise any price reductions by providing incentives to property purchasers and investors.
I decided to have a look at the new housing market and see what types of incentives are available to property investors and where the best deals are in the market. We also ask the question should these incentives be enough to tempt adventurous property investors back into the buy to let market?
The incentives
In recent weeks, there have been reports of discounts on new homes of 30%-plus - particularly in urban centres supposedly crammed with high-rise apartments.
But actually finding bargains on this scale might be difficult. This analysis suggests most builders - at this stage - are simply allowing a bigger margin for haggling over price, and most will look seriously at offers within 5%-10% of the asking price.
However, most are reluctant to entertain price reductions instead preferring to entice purchasers and investor with a range of incentives.
Steven Lees of website Smart New Homes comments that: "there are a lot of incentives out there". The type of incentive will depend on the type of property being sold.
Examples of the incentives developers use are:
* Solicitors fees paid
* Deposit paid on exchange
* Stamp duty paid
* Furnishing packages
* Cash backs
* Discount sales
* Part exchange
* Rent guarantee
How to drive a hard bargain
Many developers will provide a package of these incentives. The other thing landlords need to appreciate is that the type and extent of the incentives being offered even by large national developers will depend on the locality & the specific development. This means in developments where the builders are struggling to sell or only have a few units remaining the incentives are particularly attractive and you as a property investor should be able to drive a hard bargain.
Property investors shouldn't be afraid of negotiating. It's a buyers market out there and developers are in some cases pretty desperate to shift units. The advantage an investor has over a home owner is that because they are not buying a home, they can play developers off against each other for their business. Landlords looking at buying in Reading for instance can express an interest with a number of builders and see which one is prepared to offer the landlord the most attractive incentive to complete.
David Bexon, managing director of Smart New Homes, says:
"House builders are being ever more creative with their incentives, and some of these offers can be a great benefit to buyers, such as 100 per cent part exchange, paying contributions to costs, and the inclusion of all sorts of extras."
The headline news is the return of part exchange, which had been out of favour for several years. The concept here is simple. The developer buys your old home, freeing you to move quickly and secure your new home and cutting out the need for an estate agent. This is obviously attractive in a slow market, particularly for those having trouble selling.
But to use part exchange you must be "upwardly mobile" - your new home must be considerably, usually at least 25 or 30 per cent, more valuable than your present one. The developer will want to sell your house quickly, and so the price on offer may be up to 10 per cent less than the full market value. On the other hand, there are no estate agents' fees, and many people are willing to sacrifice the chance of a few thousand pounds' extra profit to gain a fast, chain-free sale.
Part exchanges are aimed at owner occupiers. However, landlords with an investment property that they are finding difficult to let either because it is in the wrong location, requires updating or are having problems selling may want to consider this as an alternative to trying to sell up completely into a stagnant market. Landlords can potentially use a house builder's keenness to sell their new property on certain developments to unload their investment 'dog'.
The advantage to a property investor is that they get rid of a poor performing property investment relatively easily and replace it with a property that should be highly lettable. In some cases it may even be possible just to transfer a landlords existing buy-to-let mortgage from one property to another without incurring any financial penalties from the btl mortgage lender. A landlord should inquire about the specific details of the buy-to-let mortgage before committing to a property investment.
I would caution against buying an apartment in a city centre. Landlords should instead look at buying small houses in areas of high rental demand.
Guaranteeing a landlord's rent
The other sales incentive that is particularly appealing to a landlord is the rent guarantee. This scheme being run by a number of property developers will guarantee a landlords rental income for a fixed period of time. Taylor Wimpey which owns the Wimpey, Bryant Homes and Laing Home brands to name but a few is offering investors that purchase one of their properties a guaranteed gross rental income of 6% until 2012. This offer is only available on certain development and providing that the landlord uses the nominated letting agent and financial advisor. However, it does insulate a landlord against any void period and 6% gross yield is above the current average. However, a landlord will be hooked into using a nominated letting agent with their management charges likely to be in the order of 12-15% of the gross rent, the resulting net yield is likely to be significantly below this. A landlord purchasing a new property outside a city centre would generally expect it to let well and for their voids to be correspondingly low anyway.
An example of one of the properties being offered with large incentives is a scheme of micro apartments called 'ipads' built by Barratts. The development near Cardiff Bay is being offered with some hefty incentives implying that Barratts are struggling to sell them.
The evidence is that according to a recent report builders may even be succeeding in keeping property investors in the market place by offering these incentives. For the first time in five months, says the journal House Market Report (HMR), demand for new homes from home owners and first time buyers is lower than demand from property investors - though it was widely assumed property investors would quit the market for new homes as soon as prices began to weaken so there is some evidence of property investors being seduced by these deals.
My verdict
Property investors need to be very wary about diving in thinking they have secured a bargain. One thing that property developers won't tell prospective landlords is that new houses tend to be 10-15% more expensive than equivalent 2nd hand properties to start with. This means that any discount will need to be significant to make the figures stack up initially. There are advantages of buying new properties for a landlord, namely the property can be instantly let and should be attractive to professional tenants. However any landlord needs to make sure that they stay focused on the figures and make sure that they have done their investment calculations before committing to anything.
