Developers offering a carrot as an incentive to buy a new build home

A stamp duty holiday bounce has given the UK property market a lease of life this summer. But it’s longer-term outlook is far from certain. Covid has left an air of mystery around all industries, and the housing market is no exception. 

New-build properties, in particular, face a struggle to achieve market price. This is proving to be somewhat problematic for developers of unsold developments, with these buildings sitting empty and costing money. 

But can new-build sellers up and down the country incentive buyers and investors to purchase their units in a challenging market? And what do those incentives look like? Alternatively, will they be left with empty units and potential losses on their hands or can turning to the rental market provide a solution?  

Why aren’t new builds selling?

Affordability is the primary driver for the downturn in new build sales. But the demand pool is also shrinking, which is having its own knock-on effect. Interest from investors, both domestic and overseas, has cooled off recently. 

Uncertain market conditions make it harder to predict both short and long-term gains, as no one can determine how the market will look in six, three or even one month’s time. Rents are currently falling, albeit marginally, in larger, inner cities – the traditional hotspots for buy-to-let and the focus of many new-build developments.

Consumer demand is also evolving, with renters who are looking for somewhere to live discovering more value in outer-city homes with green space. Fears of a second wave have changed the key traits that people look for when searching for a home. There is still demand for stylish buildings with a concierge, but people are also thinking about properties that feature garden space.

Unfortunately, most new-build properties – especially those in modern apartment buildings – are set up to cater to the lifestyle of city dwellers. But if investors look elsewhere, suddenly it becomes even harder to sell that penthouse apartment with city views. 

What about residential buyers?

Renting has hit a boom period, with property values pricing would-be residential buyers out of the market. The Covid crisis will most likely only widen the price gap for buyers, especially for properties above £500,000.

Over the last few years, buyers have struggled to secure mortgages large enough to cover homes in the new-build price bracket. The current recession brought on from the pandemic means that mortgage restrictions could tighten further in the months ahead. 

With flailing demand from investors and non-existent demand from residential buyers who are priced out of the market, developers are left with no choice but to slash their property pieces. However, with margins already stretched, there’s only so far they can go before the issue of severe profit loss arises.

Therefore, a decision will need to be made about the development. Do developers dig their heels in and offer incentives to coerce buyers? Or do they turn to the rental market and become the landlord of their buildings, filling up empty units to renters instead? 

The reason for renting

Even with some renters shifting their requirements to properties without outside space Covid, the inner-city rental market looks promising. In London, for example, 60% of the population will be renters by 2025, overtaking owner-occupiers for the first time. 

If the demand for rental homes outgrows demand for sales, it makes sense for developers to convert their modern apartments into renter-exclusive properties. It also provides them with some leeway, as they can collect rental income in the short term and look at selling them further down the line. 

Should developers opt against the idea of renting, they will need to find further incentives to excite buyers and ignite the market. They may, however, be limited in the number of options available to property investors. 

How can developers incentivise investors? 

Developers are left to drum up new ways of incentivising buyers to purchase their units. Ideas range from marketing-heavy tactics to short-term money-saving costs. Some of the more “out there” ideas have included raffling off properties, in the hope that they sell enough tickets to cover the costs of the home’s value.

While there has been some success in this approach in the past, trying to apply it to buildings with 100-plus apartments is a much harder task than, say, a one-off property. Therefore, developers have explored other ways to incentivise buyers. 

These include covering stamp duty charges, as well as interior designed furniture packs, free underground parking at the development, and even complimentary Transport for London (TFL) travel cards for London dwellings. So far, however, such incentives aren’t quite hitting the sweet spot. 

The incentive problem

Offering to pay stamp duty is appealing but costly. The average stamp duty (before the limited holiday) on a £500,000 property for a second-home buyer is £15,000. Times that amount by 100 units, and you’re subsidising £1.5 million. 

Other incentives don’t hold the same weight and aren’t as appealing, especially with overseas investors. Free parking might work for tenants outside of London, but few people prioritise a car space when looking for a home. 

TFL travel cards don’t hold much value to overseas investors who are located thousands of miles away. Therefore, many of these incentives are short-term fixes to problems that need longer-term solutions. 

The rental option

With incentives not quite hitting the sweet spot, we find ourselves circling back to the rental option. The last thing any developer wants is a property sitting empty. And one of the best ways to start generating income is to convert the units into rental homes. 

Being a first-time landlord for 100-plus units might seem daunting, but technology has eased many of the processes. From tenant find to managing the in-life tenancy, there are now options that facilitate a holistic renting experience. 

Landlords, whether individual, portfolio or companies, can tap into property management and letting services that allow for seamless control, from document access to finance overviews and easily arranging maintenance. 

Building to rent?

The UK lettings market is estimated to be worth £70 billion by 2022. Add in the fact that an increasing number of renters are happy to pay premium prices for luxury rental properties, and you’re already looking at potential increased demand. 

Selling a £500,000-plus unit might prove difficult in a challenging market, but renting it out for £1,500-£2,000 per month could just be the incentive developers need to switch from the sales to the rental market. 

With technology facilitating a more efficient way to manage large-scale units, suddenly, the lettings market looks like the safer bet in a landscape of uncertainty. The incentives to fill empty developments might not be flashy-sounding, back-of-the-box features. Instead, it’s a robust rental market where demand has never been higher.