Even before the current sombre market conditions took hold, there was a certain amount of consternation within the housing finance sector about the development of (predominantly) city centre new build apartment blocks.
For several years now, developers have been focusing on building complexes of one and two-bedroom apartments. A large proportion of these properties were marketed as investment opportunities with an eye on equity appreciation rather than a buy-to-let ethos, with a primary focus on rental returns.
Leaving aside recent concerns about the level of fraud in the sector, builders are increasingly finding themselves with hard-to-sell properties as financing has become more difficult, available loan-to-values have fallen and the housing market has stopped growing at such a rate.
The response to this situation has been telling, with developers unable to sell some new-build properties. Property investment firm Hattan & Grand sees the current situation as perfect for those investors who are able to secure financing.
Alyssa Savage, director at Hattan & Grand, said that house builders have been building and relying heavily on the investment market. They now have stock they are unable to sell and are selling at discounted prices.But she said: “The lack of finance has meant there has been a drop in the number of investors, which has in turn meant that competition has decreased in many areas among investors and rental demand has increased phenomenally.”
In addition, according to Hattan & Grand, the uncertainty of the market has led to house builders buying less land to build on, which decreases the supply of properties in the long term.
Savage said: “Eventually, there will be a lack of supply in properties and a demand for them that will not only even out the correction of house prices taking place, but could also make properties even more expensive due to the lack of supply.”
This view of rental demand, if not of future house prices, is endorsed by Malcolm Harrison, spokesman for the Association of Residential Letting Agents. He suggested that while these properties were often bought by investors who failed to get their sums right, in time, these new builds will feed through into the mainstream property market both as rentals or owner-occupied properties.
He said: “Rental demand is increasing strongly for a number of demographic reasons, and it will always be counter-cyclical to the residential market. As soon as house prices begin to soften, the demand for renting increases.”
Occupying force
Hattan & Grand has also seen house builders start to let their standing stock themselves, as they simply cannot sell it. The firm cites the example of a management company that has taken on more than 1,000 properties from a national house builder in the past few weeks.
This glut of new build appartments is also observed in the social housing sector. The National Housing Federation (NHF) said it has seen private developments that developers are unable to sell being offered at a cut price rate to housing associations.
However, this may not solve the problem of a general lack of affordable housing, as John Dumont, spokesman for the NHF, states: “More often than not, these developments do not meet the minimum standards regulated by the Government that housing associations must adhere to in terms of quality and space.”
Housing Associations previously had access to a glut of ready-built properties in the last housing market downturn, when the Government helped housing associations to take advantage of a surplus of empty properties.
Nevertheless, Dumont said: “The Housing Marker Rescue package gave associations grants to buy off-the-shelf flats in the early 1990s. There has been talk of the same happening again, but the associations would need to be careful not to get lumbered with sub-standard homes.”
The Government is determined to push through an increase in social house building in the next three years.
Dumont said: “There are concerns whether these plans can be delivered now, as a lot of social housing is delivered through agreements in which a private developer will build some affordable housing as part of their planning permission. Less large scale building will reduce the amount of affordable homes being built.”
So it would seem that the desirability of new-build flats will increase through a process of rising rental demand, the cessation of further speculative building and a possible absorption of better-quality excess properties by housing associations. This can be seen as new-build properties are already making a mark in the owner-occupier market.
Peter Bolton King, chief executive of the National Association of Estate Agents, said: “There are plenty of professional landlords in the market sniffing out bargains. Although there are fewer buyers, there is an advantage to these properties being available.
“January’s figures show the percentage of first-time buyers rising quite a lot. In property markets, there is always a silver lining.”
He added: “I acknowledge that some of these new builds are still not selling, but there is still a lot of money available in the market.”
Whatever the outcome, this sector retains a degree of instability that the rest of the country’s housing stock has yet to experience. Prices may well fall further, which would help rental returns, but even so, any investor will need to consider carefully before investing in a sector where supply outstrips demand. n
