Are properties built mainly for investors?

August 04

A fairly common claim among some investors is that New Properties are built to investor demand rather than for owner-occupiers.

It is my view that the limiting factor to housing developments is not investment capital, nor production capability. Instead, it is supply of suitable land.

Successive governments have renewed planning policies that, with minor changes, have upheld the principle that control of what is built is a function that belongs jointly with the landowner and government, rather than with the landowner alone. This function controls not only the safety and detail of construction of buildings (the Building Regs), but a planning politic on the type of construction that will be allowed in different areas.

(In a few extreme cases, it belongs with government alone, but the number and value of compulsary purchase orders has declined dramatically over the past 40 years, and now are mainly reserved for major projects such as rail links and airports.)

The number one issue facing many builders, particuarly smaller builders is, as a consequence of this regulatory framework, the acquisition of a landbank with appropriate planning permissions.

Typically, once smaller builders acquire land, they attempt to revise the planning permissions to construct the most profitable property they can build.

Where planning permission is avaialble, this often tends to be starter homes or flats. It is typically more profitable to build a block of 8 flats than to build 2 4-bedroom houses on a single plot.

The question is then who buys these? The normal answer is - whoever will pay the most for them.

Essentially, there are two groups of people buying residential property - those who are buying to live there, and those buying to invest. Some classes of property will appeal to those who want a second home, or a retirement home, or some other specialist residence.

However, the rent/purchase price curves in most areas typically give the highest return on capital to the smaller properties. As such, the canny investor will buy 2 2-bed flats rather than 1 4-bed house for the same price, because the combined rental on the two flats will be higher than the single rental on the house.

As we have seen above, the developer has, say, a choice of building 8 flats or 2 houses. His profit will be higher if he builds the flats...

... which are exactly what are appealing to the investors.

Now, whether there is long-term demand for these properties is another question. The whole Manchester saga over the last 2 years has shown what can happen when too many builders build for too many investors who chase too few tenants.

The moral of this story...

... buy where there is real, sustained, rental demand

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