Weekly Market Comment

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02 April 2009

April Fools

There was a strong temptation yesterday to include a ludicrous but semi-plausible news story to try and dupe the unsuspecting reader. However, it struck me that in better times many events of the past 18 months have all the hallmarks of classic April Fools headlines; Iceland Bankrupt, Major Banks Nationalised, $50bn Dollar Wall Street Pyramid Scheme, Dollar to be replaced, and so on. I therefore concluded that in these troubled times the truth is indeed far stranger than fiction.

New Build Market Survey

As mentioned in a previous issue the New Build market has its own drivers and market dynamics that influence price point and activity. The upshot of this is that the sector is not accurately reflected by many market statistics and commentary and it is for that reason we have our own bespoke tracking system for the new build market in Scotland.

With increasing enquiry levels and some signs of improvement, albeit from a low level and still well below past activity, it is worth looking at activity within the new build sector specifically.

Our New Build Sentiment Survey operates in a similar way to the RICS Survey, by asking if enquiry levels has increased, decreased or stayed the same at new build sites across Scotland. The blue line shows the balance of opinion turning upwards at the start of the year from a low point toward the end of 2008. The graph also shows a far higher level of positive responses in February than in preceding months, showing a marked change in the front line experience at sales cabins across Scotland.

As part of our market tracking we also monitor the discount being offered and the difference between original launch prices and actual reservations. The New Build Discount Survey Graph shows both the average and maximum discounts achieved within our survey, based on actual transactions rather than offered discounts.

It should be noted that while the average discount has been around the same level as the wider market this does not factor for the wide use of incentives such as turf, flooring etc as well as many schemes such as part exchange and shared equity which further improve the incentive to buy. However, notably there has been consistent deal making in excess of 30% and in certain developments in excess of 40-45%.

The fundamentals of location, supply and developer distress have either protected or exposed certain developments and therefore affect the levels of discounting different developments are prepared to offer. As with any market the devil of a deal is in the detail and if with certain factors aligning currently available new build opportunities may prove to exceed value that will be achieved elsewhere during the course of this market downturn.

Can Less Really be More?

With more and more would be sellers opting to rent out their properties instead of selling the supply of quality rental properties have increased. This has given the prospective tenant both choice and the empowerment to negotiate.

With this in mind, those thinking of making their property available to let will have to consider their intentions when deciding on their rental pricing strategy.

In a competitive market rental pricing has to balance a fine line between maximising rental income and minimising unprofitable voids. Bear in mind a void is not only no income but is increased costs of council tax, gas, cleaning and possibly insurance etc.  Unlike selling, accepting a lesser amount whilst counter-intuitive has the potential to increase overall income. 

Case Study

If you were to offer a flat at a competitive rent of £700 pcm and secure a tenant without any void period you could expect to receive £8,400 in rental income in a year.

A conventional approach would therefore support trying to achieve £750 pcm, promising an extra £600 pa. However, by making the price point less competitive it is possible that a tenant will not be found as promptly and a void will ensue.  If that void equates to just 26 days in a full year, far from being better off by choosing a higher rent, you would actually be £250 worse off at the end of 12 months than if you had opted for the more competitive price point from the outset. This would also mean that you would have to wait until the 15th month to breakeven with performance of the lower rental rate, presuming you had a continuing tenancy after the initial void.

While it may be the case that waiting to achieve a higher rent may be desirable, if there is little time or financial pressure, (this is rare) in many circumstances where covering finance obligations or maximising income are key drivers, considering a more competitive rent may in fact maximise gains whilst minimising the risk and costs associated with void periods.

When considering your rental strategy it is beneficial to consider what you intend to do with the property in the future, and to listen to professionals involved in the market place who can advise you of current demand and competition, enabling an informed decision.

For further information on property letting and management, please contact Diarmid Mackenzie Smith on 0131 624 9036 or email lettings@rettie.co.uk.

Rettie & Co. are pleased to announce their continued sponsorship of the famous Ship Inn Cricket Team as we continue to grow our presence in the East Neuk Residential Marketplace 

Links

Top 100 April Fools Hoaxes
The Ship Inn, Elie

Contact Us

If you have any questions, would like any further information regarding the above content or would like to discuss how the Rettie & Co. Consultancy & Research Team can help your business, please do not hesitate to contact:

Andrew Meehan

Researcher

t: 0131 624 9051

e: andrew@rettie.co.uk 

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