Investing in new-build flats: a way to lose money in a rising housing market?

Price of new flats falls 0.9% as rest of house market soars

By Jim Pickard, Property Correspondent

Published: January 20 2007 02:00 | Last updated: January 20 2007 02:00

The price of the average new flat in the UK has fallen 0.9 per cent in the past three years, even as the rest of the housing market has risen 31 per cent.

The news will make alarming reading for the tens of thousands of investors who have bought new apartments in recent years in the hope of rapid capital growth.

The Financial Times has analysed data from the Land Registry and found a vast discrepancy in capital growth between different types of housing.

The average home leapt in value 31 per cent from £161,665 in September 2003 to £211,453 in September 2006. But the typical new flat fell slightly from £191,223 to £189,564 during the period. The figures are the Land Registry's most recent detailed breakdown of the market.

The data should be treated with caution as they could reflect developers building smaller flats or in cheaper areas. But theyshow a striking trend.

"It is straightforward supply and demand. The housebuilders keep on repeating, parrot fashion, that there is a massive undersupply of housing," said Alastair Stewart, a construction analyst at Dresdner Kleinwort. "The undersupply is not in flats, but in houses, which they are not building in large numbers."

Housebuilders have built an increasing proportion of flats in recent years as a result of government policies that encourage high-density, brownfield sites. More than half of new properties are now flats compared with20 per cent in the late 1990s.

There is an oversupply of flats, especially in larger regional cities such as Manchester, Bristol and Birmingham. To the east of London, where the government has earmarked hundreds of thousands of homes in the future, there are also fears of a glut.

A recent report by agents Savills showed that property prices in Docklands rose just2.2 per cent between September 2002 and June 2006,when much of central London enjoyed a boom.

Demand has so far been sustained by buy-to-let investors, who account for more than half the units in any typical scheme. But experts believe rising interest rates could sap the appetite of many investors for more buy-to-let purchases.

The typical net "yield" on a residential property has fallen to about 3.5 per cent - taking off30 per cent costs from the 5 per cent "gross yield" - way below the cost of borrowing. For new flats, the yield is often lower.

Mr Stewart said many investors were finding it hard to attract tenants. "These are often yuppie pads in towns like Nottingham and Leeds where there aren't enough yuppies to fill them up," he said.

Copyright The Financial Times Limited 2007