Every month we take on a few new properties that investors have just bought. In the last few months it's been noticeable that these are flats rather than houses.
In recent years, many investors have opted for houses or other freehold properties - prices had dropped since the peaks of 06/07 and flats were considered less attractive due to the associated service charges and depreciating lease.
But the recent upturn in property values since the Government intervened in the market in late 2013 means that the price of freehold properties have risen and that flats again are becoming the more attractive investment option. Yes, there are service charges, but when a flat now costs £20,000 to £30,000 less than a similar sized house, many investors are coming to the conclusion that even with the service charges, flats are the better investment.
Take the following properties - which would both rent for £600 - as an example. The flat is fairly standard - there are plenty of them around. 2 beds, clean, modern, ready to move in. You can pick one up in the current market for £105k to £110k and a tenant will follow very quickly thereafter. The service charge will be about £1000 on an annual basis. Maintenance costs can't be guaranteed but should hopefully be lower as the building is newer and anything to do with the fabric is covered as part of the lease.
If you want £600 of income, the alternative would be a 2 bed house somewhere around town. The market has moved on these recently and something like this will cost you upwards of £125k in most areas of Northampton now, and over £140k in places such as Abington or Hunsbury. There's no service charge. Again maintenance cannot be guaranteed but you're liable for the fabric of the building which is likely to require more attention given the age of the building.
So the trade off is an extra £25k up front vs. an extra £1k per annum in service charges and with that considered it's fairly obvious why the more commercially focussed investors are now taking flats over houses. The logic doesn't follow for everyone though - a 2 bed Hunsbury house was recently sold to an investor by Harrison Murray for in excess of £150k, so there are some who will still pay the premium for what they consider is the right product. The general trend is interesting though - flats are enjoying a renaissance!
Facts about flats:
- There's no shortage of demand - we can rent flats just as well as houses.
- When the property market dipped in 07/08, flats were hit hardest, so there are more bargains around now.
- The value of flats is affected by the length of the lease, but not until the lease gets down to about 80 years - most 'new build' flats built during the early 2000s have well over 110 years left on them.
