Off-Plan Or Off Limits?
The Times, Bricks & Mortar, 25th May 2007The property market may be slowing and interest rates rising, but some unflinching punters are still trying to seize their last chance to make a quick profit out of property.
Flipping, or buying property before a brick is laid and selling it on before completion, remains as common as it is frowned upon by the building industry – despite signs that some buyers are struggling with their investments. Speculators who get it right make enviable returns. Those who buy the wrong property at the wrong time can be saddled with debts and a flat they can’t sell. Figures from the Financial Services Authority show that 45 per cent of repossessions are new flats. The research reveals that almost 80 per cent of repossession lots at auction were in postcodes dominated by buy-to-let properties.
So why are investors still taking the risk?
The formula for flipping is deceptively simple. Get in early, buy at rock bottom prices, pay a deposit of just 10 per cent which you might even borrow on a credit card, and sell six months later to another investor, who may well repeat the cycle before the final brick is laid. That way you not only avoid stamp duty and the hassle of getting a mortgage to complete on the deal, but also make a lot of money – providing the market goes the right way.
We have all heard the stories of the off-plan apartments in Manchester and Leeds city centres changing hands faster than they were being built. When the northern market flattened out a couple of years ago, attention moved back to London, then in the property doldrums. Investors applied the same formula to areas marked out for regeneration and prices soared.
Property values in Hackney rose by more than 20 per cent last year alone, according to Hometrack. Those who spotted the potential in unlovely corners of the capital such as Dalston have all the right to feel smug now. In early 2006 The Interchange development in Dalston was snapped up by the Young Group, a property investment company, which immediately sold the scheme on to individual investors for sums ranging from £210,000 for a one-bedroom flat up to £300,000 for a three-bedder.
The flats will be ready at the start of next year. But local estate agents are expecting some unfinished apartments to come on to the market any day. Anne Currell, of Currell Residential, said; "It is highly likely that many will consider selling on to owner-occupiers. That way they can take their profits and not pay any stamp duty." According to Currell, a one-bedroom flat would sell for £265,000, a two-bedder for about £325,000, while a three-bedroom flat would fetch £400,000-plus. So investors could cream off sums ranging from £55,000 to £100,000 from an initial deposit of, say, £20,000 to £30,000, in little more than a year.
Behind every success story there are tales others who did not manage too offload their apartments in time. The last thing developers want is to end up competing with their own investors. This can happen if buyers start selling their properties while the developer is still marketing the rest if the scheme. It is an outcome that wreaks havoc on a developer’s balance sheet at the best of times but which can be catastrophic if prices are flat or even falling. Outside London and the South East, price rises have been slowing for some time. Experts predict that the property market in the capital will follow.
To avoid unwanted competition in the tougher times ahead, many builders now require buyers to sign contracts preventing them from selling before completion. David Bexon, of Smartnewhomes.com says; "Housebuilders genuinely want to build sustainable communities."
Bernadette Cunningham, of the Thornsett Group of developers, takes pride in having sold three quarters of the Charterhouse development in Clerkenwell to owner-occupiers even though it will not be ready until next spring. "We did not want to encourage speculative flipping," she says. When the development first launched in March 2006, one-bedroom flats were sold for £325,000. At second phase in early May similar flats fetched £395,000. It is impossible to say where prices will end up when the final brick is laid next year. But given the gains so far, the temptation to cash in must be overwhelming.