New build, new strategy for landlords?
By West One
Whether you are a first-time BTL investor or a professional landlord, undoubtedly you will always look at properties that will provide a high rental yield and potential sell on value.
Typically, investors will seek out properties which will see them buy below market value, improve the property and secure tenants or if the opportunities arise, sell with the aim of making a quick profit. With turnaround time being key to prevent void periods costing investors a new build property can provide an investor with a property which is tenant ready along with a high-yield expectation.
The number of new build homes has been on an upward trend in the UK, with the exception being covid years which impacted the start and completion of new housing projects. UK government data states in June 2022, new build dwelling Starts in England were estimated to be 180,820, a 5% increase when compared with the year to 30 June 2021.
The rise of new build demands is partly down to shared-ownership schemes and ever-increasing need for affordable housing in the UK. With property prices steadily increasing since the 1990s, governments have been expected to manage the demand for affordable housing. In England, from 2021 to 2022, 59,175 affordable homes were delivered (completions), representing an increase of 13% on the previous year, and of all the new homes built 92% were classed as affordable homes.
Wider factors impacting government decisions around new builds includes challenges surrounding net zero, energy consumption and increasing utility bills. Net zero targets have undoubtedly played a role in the proposed EPC regulations on rental properties, with a minimum EPC rating needed to be met. Any upgrades needed will be the landlord’s responsibility, turning energy deficient properties which may be draughty, uninsulated, or unloved into energy efficient properties.
It's conceivable that landlords may start to strategically sell properties which require extensive work, and invest in new build properties, which are highly likely to meet EPC targets. According to the Telegraph, in 2022, one in eight new builds was purchased by an investor, which is the highest level since 2017, representing an increase of 500% from 2021.
The volatility of pricing which is being exacerbated by regional fluctuation is proving difficult in the marketplace in terms of how properties are priced and if their valuations reflect true market value perceived by lenders. Some lenders approach new builds with secondhand pricing, akin to new vs used cars. The moment you, as the owner step inside, (or drive off the forecourt) you can expect to lose a degree of its value.
Investing in new builds as part of your Buy-to-Let portfolio will have many advantages when compared to purchasing a secondhand property. The new build can appeal to tenants due to its newness; landlords may be able to charge a premium in rent because of the condition of the property, there will be minimal maintenance costs, property and goods will be under warranty and the property will meet proposed EPC regulations. And, as with a lot of things, new is often better, but there is a downside when looking at new builds.
The property owner may be able to charge a premium in rent, but they will also be charged a premium in the price they pay for the property. With affordability already a challenge, investors would typically look for a property which is in a good geographical area with a track record of providing a high yield.
New builds can appear to be a popular choice for investors, however being approved for a mortgage may prove difficult. Some lenders are cautious in how they view new builds, with their value dropping after initial purchase, no history and yield estimations. Landlords could see void period if building works are still going on nearby and lenders may ask for a greater deposit, due to increased risk. As a borrower you can expect to have your application inspected in greater detail, as the property has no history, no previous tenants, environmental considerations (e.g. may sit on or close to what was previously a floodplain) or may be purchased off plan, so could expect delays in construction.
Specialist lenders like West One who take a manual approach to lending can help an investor look at the challenges around new builds, affordability, and the changeable market. By speaking to the West One team, they will be able to review complex case with a manual approach.
New builds can have many benefits which in the long-term may benefit landlords, but as with many financial decisions there will be elements of positive and negative and it’s important to assess all options and assess your situation. There is no letup in the number of new builds being constructed, so for those not previously opting for new builds, now could be the time, to beat EPC regulations, enhance profitability with minimal maintenance costs, but mortgage approval may be challenging, or better value may be found in preexisting properties.
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