Sometimes it really is possible to have too much of a good thing. With the aching shortage of housing in the UK, one would not think that, at the moment, there is too much development. Yet, this very problem is rearing its head in the form of new build flats and apartments.
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As developers aim to please the trend for city living and investors take advantage of young professionals who prefer the flexibility of renting, there appears to be a real danger of overkill in the market, leading to danger not only for investors, but lenders as well.
A definite factor for lenders is gauging the long-term stability of the value of new build flats. In the event of any property downturn, new build flats can become the most difficult of properties to sell, while last year’s must-have flat can immediately be devalued by the emergence of a shiny new block next door.
Richard Sexton, business development director at e.surv, comments: “Lenders are right to be cautious in this area. We have had many conversations with lenders concerned with the new build market. It is largely driven by buy-to-let (BTL) investors and we’re starting to see the first investors having property repossessed. They are either not getting enough rent or no rent at all. Blocks in some towns are almost entirely not owner-occupied. It only takes one or two in a block to undersell and it has a knock on effect for all in the block.”
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Distortive effect
Part of the problem in lending to this sector of the market is the distortive affect developers’ deals have on the property’s true worth, as Alan Cleary, managing director of edeus, points out.
He says: “How much the flats are actually worth on the open market is shrouded by developers’ incentives. Lenders are looking for an open market valuation and as the market gets tighter, developers are becoming more imaginative with their incentives. This disadvantages the lender. You have to be cautious and understand the risks.”
Sexton adds: “It is indicative of the problem of oversupply that before, it was not unusual to see deals giving a 5 per cent cut in the price through cashback or a free kitchen, but now we’re seeing extremes of 60 per cent. New build flats are concentrated and over-inflated in price. While many lenders are happy to lend on them, they don’t want them to make up too much of their book, so underwriting will take this into account and restrict things like loan-to-values (LTVs).”
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Rooftop Mortgages is one lender which has decided to take a step back from the new build flat market and is restricting LTVs as it waits to see how the market develops. Alison Beech, business development director at Rooftop, says: “We are concerned that there is an oversupply in this area following feedback from our valuation panel. It is not everywhere, but there are certain metropolitan areas where it is the case. Developers are throwing blocks of flats up in response to investor demand and the question is, what becomes too many in one location?
“We will keep it under review and if the market shifts, so will we. We are constantly reviewing the market and where our panel express a general concern with the market we will take a measured approach. However, we are not forecasting anything in particular for the market.”
A slump not likely
Cleary certainly does not feel the new build flat market is likely to slump. He says: “You have to have a lot of things happen for a slump to happen in any part of the mortgage market. New build doesn’t represent a significantly greater risk than other sectors. Mortgage lenders just need to know what the risk is and price appropriately.”
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Mark Glithero, managing director for Lexicon, agrees and says: “There is only the possibility of a slump in this market if interest rates get hiked by 0.50 to 1 per cent. A lot of places would no longer be viable then and smaller investors would be vulnerable.”
Glithero highlights Manchester, Nottingham and Leeds as areas facing an oversupply of new build flats, and comments that part of this is being fuelled by the influence of external investment coming from countries like Ireland, and the problems first-time buyers face getting on the property ladder.
He adds: “The downside of oversupply is rents and yields might reduce in the short term, but it is a reasonably safe investment because most people investing are those with bigger portfolios.”
While this oversupply of the market in particular areas will certainly give some BTL investors headaches, prudent lending should hopefully keep matters in hand. Sometimes it pays to be more cautious, but as Sexton concludes: “Ultimately, it is up to the mortgage lender and the borrower to take account of the risk and know exactly what they are getting into, including the risks.”
