Investing in New-Build – Obsolete or Sensible Opportunism?
.............................................................................................................................................................................

In the midst of the boom, the property sector was experiencing a new-build mania. Investors and end-users alike were rushing to buy, often 1 to 2 years off-plan, properties that developers were erecting across the country at an unprecedented speed. Result: Demand continued outstripping supply as prices and valuations escalated to historic highs. This self-inflating bubble could only be halted by one thing: the drying up of cheap and plentiful lending. The rest is history.

So a year on, where are we? The industry seems to have come to its senses, waking up with a hangover from a decade-long, debt-fuelled craze. Lenders will only lend up to 65-70% of the value of new builds, surveyors value them to levels commonly 25-40% lower than they would have a year ago, and cash-strapped developers have no choice but to let their once prized assets go for a minimum of 25% discount off these low RICS valuations.

Is it time to get in on the action? Distressed sales from developers are a good sign for opportunistic investors. After all, with genuine discounts off realistic valuations, there should be real equity and solid long-term growth prospects in these brand new, well located and high-spec properties. They come with build guarantees and are very appealing to prospective tenants.
The crux of the problem lies in the funding: with 65-70% loan to value, investors need to put in more money than for resale properties unless there are very substantial discounts in place. Moreover, such massive discounts are a tell-tale sign of oversupply which severely undermines rent levels and capital growth as large numbers of similar properties enter a subsiding market.

All in all there are definitely new-build bargains to be had. As always, rigorous due diligence is essential. The discount level needs to be at least 30% off the market value, preferably based on a recent RICS valuation, as they can otherwise often hold some nasty surprises. The rental figures need to be very realistic, taking into account the size of the rental market as well as the number of comparable properties available in the local area. If these cautious rental figures still leave a healthy cash-flow after expenses (mortgage, service charge, ground rent…etc), the property could well be a unique opportunity to capitalise on the current turmoil and yield some excellent returns. The current fire-sale of good quality new-build properties might not happen again for a long time…

Alpha Property Investment Ltd

Click Here To View Our Current Deals Or Click Here To Return To Our Articles And Resources Page