New-build flats – a paradox of supply and demand

11/08/2008

So why an oversupply of new-build flats when the UK is generally thought to be experiencing a “housing shortage”?

The answer is very simple: so-called investors who believed property – particularly new-build city flats – was a market in which it is possible to “get rich quick”.

They latched on to figures showing impressive overall levels of capital growth in property, forgetting that this growth was, almost without exception, achieved over the medium- to long-term. And also forgetting (or ignoring the fact) the really good statistics came from prime traditional properties in the most sought-after locations of our major cities.

Consequently thousands of people have purchased (either as owner-occupiers or investors) new apartments that have been built on post-industrial sites in the waterfront districts of Edinburgh and Glasgow, believing that these would rise in value at the same rate as Georgian/Victorian properties in prime locations such as the New Town or Park Circus.

As some have discovered to their cost, however, values have risen only marginally, stayed where they were and have, in some cases, actually fallen substantially.

For housing to be a profitable investment, one must take a medium-term view, at least, even with proven properties in prime locations. Only in periodic bursts of “market madness” (which in reality happens rarely) have people profited handsomely in a few months or a year and when they did it was usually as much down to good luck as to good judgement.

Consequently, anyone investing in new-build apartment complexes in “untested” locations – such as Granton or Glasgow Harbour – should think of a return over the medium- to long-term, with a very definite emphasis on “long”, as well as being realistic about the level of return, which I suggest is more likely to be “inflation-beating” than “inflation-busting”.

A period of over-production followed by a credit crunch has led to such a bewildering choice of new and second hand modern flats that potential buyers might be tempted to simply stick a pin on a street map. But despite their physical similarities, modern developments can and do differ in terms of quality of life – factors which will play a big part in determining future values.

If considering such a property, the first thing to do is check the covenant of the other proprietors. Twenty flats in the ownership of one person in a block of 100 units might make me suspicious, as would a high number of owners with obscure foreign addresses.

Make sure also that the building is factored by a company with a strong record in property management. Without this, a laissez faire attitude to the collection of maintenance and other communal charges may emerge, which some people could take advantage of, putting an added financial burden on the majority of responsible owners who do pay their way.

Being within comfortable (and safe) walking distance of a convenience store will help make the property more saleable in years to come. The thought of having to use their car to buy a newspaper or pint of milk is likely to be a big turn off for future buyers.

Most important of all, the buyer should be aware that a new-build flat – like a new car – is likely to decrease in value as soon as the owner receives the key. Unlike a car, however, the flat should eventually return to its original price and gain in value after that. Just by how much it does increase will depend largely on supply and demand within the market – but being part of a development with a properly structured management system will obviously contribute in a big way.

David Alexander is proprietor of D J Alexander, a letting and estate agency with branches in Edinburgh, Glasgow, London and Dubai.

THE SCOTSMAN, 11 August 2008