Key knowledge to help you negotiate the best investment price
We recently received an email from a property investor asking how off-plan and new build property is priced by developers. Specifically, the investor wanted to know why similar properties could be priced so differently in different areas, and how much leeway this might offer, if any, in negotiations on price with the developer.
The 3 factors of new build pricing
There are three main factors of price used by developers to determine the value of their developments. These are:
- Land
- Build Costs
- Profit margin
As a rough guide, these factors are divided into equal parts: one third on land; one third on build costs; one third on profit margin.
What affects off-plan and new build prices?
There are many subfactors that affect the value of off-plan property in the UK. However, they all come down to basic supply and demand. Understanding how each element is affected by supply and demand gives the professional investor an edge when negotiating on price.
· Demand and land prices
Demand for residential land depends on how much desire people have to live in an area. This demand is driven by the property fundamentals:
- People want to live where it is convenient to do so – near shops, and recreation and leisure amenities.
- Families want to live in the catchment areas of good schools, to help provide the best future for their children.
- Young and old residents need good transport links, to make travel to and from work and family easier and faster.
- On the subject of work, it’s essential that there are job opportunities nearby – for both main earners and second income earners (particularly for families with children of school age).
- Major investment in infrastructure and regeneration upgrades surrounding areas, improving the habitat for living and working, and encouraging new businesses to move into the area.
· Planning and land prices
Planning consent is another consideration when evaluating the cost of land. While the government is acting to simplify the planning process, it can still pose difficulties to obtain planning. Legal issues must be tackled and overcome. This may include re-designation of industrial land, for example. The process of obtaining planning permission on land can be expensive.
Land bought without planning permission can remain undeveloped for several years, as planning permission is sought and hurdles negotiated. Money used is effectively locked up, and unable to be used elsewhere.
Once planning permission has been granted, the value of a development plot can rocket – and often does, because all the barriers to profitable development have been removed.
· Supply and land prices
Where local authorities are hesitant to make land available for development, the land is scarce and land prices will rise.
In London, Mayor Sadiq Khan wants to provide tens of thousands more homes. This should, over time, help to ease the affordability crisis in the capital.
However, Mayor Khan’s London Plan also includes strategic industrial land provisions which state that ‘development proposals for uses in SILs other than industrial, storage, services, flexible premises for SMEs, and workplace creches and cafes, should be refused’. For residential developments to be permitted on unused industrial land, local authorities must ensure that the industrial land is replaced like-for-like! The result is that disused industrial land is being lost to residential development, and thus keeping upward pressure on land prices.
· Property prices and land prices
Another factor that affects land prices is the prevailing price of property in an area. If property prices rise beyond affordability, or, for investors, beyond potential reasonable returns, demand will fall. In part, this is why prices in some areas of London have stagnated, while in many regional cities property prices are rising at an increasing pace.
How are build costs affected by supply and demand?
Build costs are also affected by supply and demand, though the influencers come from different sources. Predominantly, these are materials and labour.
· Materials and build costs
Material costs include raw materials and prefabricated goods: concrete and cement; bricks; roof tiles; insulation materials; timber; etc. When the cost of these materials is high, build costs rise.
Raw materials are affected by global as well as local economic factors. As the price of resources rises, so, too, does the cost of manufacturing the materials needed to build new homes.
Developers are constantly seeking ways to reduce build costs, such as manufacturing constituent parts in factories and assembling on-site (modular housing).
· Labour and build costs
The cost of labour is also a large and unavoidable expense for property developers. To build more homes, developers must employ more skilled labour, or train enough workers to fill future labour gaps. As the demand for labour increases, upward pressure on wages rises. Indeed, over the past year, wages in the construction sector have increased at around 5.9% – twice the average across the whole economy.
When building new homes, developers cannot avoid the costs of building. Raw materials and labour costs are what they are.
Developers’ margins and property prices
Now, we come to the final factor affecting new build prices: the developer’s profit margin. This is the moveable target; the factor on which you can negotiate. There is a general rule that I’ve found to hold true, and this is that negotiation is easier when demand is slow or falling.
Developers want to sell property. They need to sell property. If buyer demand is low, then as an investor you have more muscle to negotiate a discount. If demand is high, then discounts are likely to be lower.
When negotiating on price, you should avoid the five common mistakes made by property investors:
- Talking too much
- Making an offer that is too low
- Hanging around for a response
- Being too enthusiastic
- Asking for everything at once
You should always be realistic about the price you may negotiate to. Remember, the developer’s profit margin is likely to be around a third of the price of a new build home. On a property valued at £210,000, this would equate to £70,000. So, a discount of between 0% and 33% may be possible.
When negotiating, you should consider that the developer is not in the business purely for the love of it. They need to make some profit. If you achieve a discount of, say, 10% (£21,000 in this example), you have reduced the developer’s profit margin by 30%. That’s quite a hit for the developer to take.
Our access and expertise in the off-plan property market help us negotiate some incredible discounts to current market value. Want to know how we do it? For a consultation to discuss your property investment strategy options, get in touch with Gladfish today on +44 207 923 6100.
Live with passion
Brett Alegre-Wood
