Moving into new builds

New build properties are exempt from the latest investor-directed LVRs and yet, to date, there has not been a big increase in investors taking up that option.

Friday, April 28th 2017, 12:00PM

by Miriam Bell

The Reserve Bank’s most recent round of lending restrictions mean that investors are required to have a 40% deposit in order to secure a loan for an investment property.

That requirement has stymied the goals of a lot of investors and, effectively, taken them out of the market.

However, there are still strategies investors can employ to continue building their portfolio in the face of the LVRs.

Perhaps the most straightforward of these requires a move away from investing in existing properties to investing in new build properties.

This is because lending for new builds is exempt from the latest LVRs for both investors and owner-occupiers - and that means investors only need a 10% deposit for a new build loan.

It sounds like a simple way to work around the LVRs and yet, to date, there does not seem to have been a significant groundswell of investors moving into new builds.

The Mortgage Supply Company’s David Windler said he has not seen a big increase of investor interest in new builds.

“This is a bit surprising as, purely from a lending point of view, new builds seem like a logical option because half the deposit is required.

“But maybe when investors start looking at what they can get for a sum of money, then the numbers just aren’t working for them.”

It was possible many investors are not that familiar with new builds and focused on reports of cost overruns and buildings delays, he said.

“I wonder if many investors are not confident enough with the product to move into new builds more.”

Windler’s observations are not isolated, with Property Institute chief executive Ashley Church also saying he is not hearing of big numbers of investors shifting into new builds at this stage.

He said that, given the current lending environment for investors, moving into new builds is counter-intuitive.

“Or you would think it would be. Relative to other options in the market, or other markets, at the moment you would think that new builds would be pretty attractive.”

Church said it was bizarre more investors weren’t taking up the new build option but possibly there was some, not immediately apparent barrier to it.

Traditionally, costs and time delays have been considered an impediment when it comes to investing in new builds.

But data released by homes.co.nz this week suggests that building a new property, rather than buying an existing one, can be more lucrative.

It found that, in hot markets like Auckland, Wellington and Queenstown, new properties typically sold for around $600,000 more than an empty section – which could equate to around $150,000 in capital gain on average.

Homes.co.nz spokesperson Jeremy O’Hanlon said the stresses of building new are not for everyone because of the additional variables including delays, unforeseen earthworks and the people involved in the build.

“But if you're careful and do your diligence it looks like building new can be a financially smart approach."

On the coalface, building companies indicate that factors like this, along with the LVRs, means there has been some increase in investor interest in new builds.

Keith Hay Homes’ national sales manager Barry Walker said they are seeing a reasonable number of investors buying new builds, particularly in the Auckland region.

But he thinks many investors don’t realise there is an LVR exemption for new builds, while others believe that the consent and building delays with new builds mean it’s easier to buy an existing house.

“Having said that, I think that we will see a big increase in investors buying new houses in the near future. That’s partly because more will become aware of the LVR exemption.

“Also, now that Auckland’s Unitary Plan is largely operative that will drive investors looking for opportunities to capitalise on their existing properties.

“People are learning what they can and can’t do and will start to move into the new build space increasingly.”

Signature Homes spokesperson Shaun Taylor agreed that investors’ interest in new builds is only likely to grow.

But he said they have already had significant interest from investors, particularly in Auckland, Hamilton, Christchurch and New Plymouth since the LVR’s were introduced.

“We are finding that once investors start the discussion with us they are keen to build when they realise how affordably they can build a new bespoke investment property to suit their needs.”

In his view, the current market and lending environment mean there has never been a better time to build.

He said investors find that building with building companies, which offer independent guarantees, eliminates the risk.

“It also enables investors to build in cities they don’t live in to diversify their portfolio geographically. Plus they get a brand new home which will have higher resale value and reduced maintenance costs.”

Read more:

Finding solutions to 60% LVRs

New LVR rules clarified

Restrict investors to new builds – Property Institute

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