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Is buying a new build a good investment?

News & Press March 22 2024
Is buying a new build a good investment?

Everyone getting into property investment will eventually come up with a question: Is buying a new build a good investment?

A new build is a property available to purchase from new, usually from the property developer. 

Most new-builds in the UK can be found in the outskirts of the cities, around commuter belts and in favourable locations undergoing regeneration, which is often a strong indicator that property prices will increase.

Compared to existing housing stock, new builds are generally considered hassle-free and come move-in-ready, allowing homeowners to settle in quicker without making improvements or undertaking repairs. At the same time, they tend to hold their value and can deliver attractive returns for investors.

We dive into what makes buying a new build a good investment, and some of the key aspects property investors should consider.

Are New Builds Overpriced?

You may wonder if you’re likely to pay more for a new build property. 

The answer is, possibly. New homes are generally priced to the maximum the market will allow, and, on average, come with a premium of around £5,000 to £8,000 compared to an older house – this is usually due to the advantages new build homes offer over older houses, such as lower running costs.

So is buying a new build a good investment? 

The good news is that new builds generally tend to appreciate in value slightly faster than older homes. If you compare new build prices with existing stock in the past decade, between 2009 and 2019, UK new build prices rose by 46.9%, compared to 41.5% with existing stock – a difference of 5.4% –  and regional variations can mean this figure gets even higher. 

Although investors will pay a premium for a new build, they make a great brick-and-mortar investment when it comes to holding and increasing their value.

Another factor making new builds an attractive investment is the UK Government’s Help-to-Buy scheme, which allows first-time buyers to purchase a brand new property for just 5% deposit, with an additional Government-backed loan of up 40%, interest-free for five years. 

This means that it’s much easier for first-time buyers to get on the property ladder without having to wait years to save up a big enough deposit. This scheme has been a great success in helping the new build market to remain buoyant, even during periods of economic downturn.

In addition, new builds are often more energy efficient than older properties, with the latest insulation, efficient heating systems and more. This makes them a great long-term investment for buyers who are looking for a cost-effective home but also for those who are interested in buy-to-let property investment. 

This is primarily because tenants prefer to live in new and more energy-efficient properties over older ones. Finally, new builds can come with generous warranties from developers, which cover the structure of the property and any appliances that come with it. This offers buyers extra peace of mind that their investment is in good hands.

Advantages of Buying a New Build

#1 Chain-Free

The process of buying a new build is generally simpler than buying a property from a private seller. 

Usually, when buying a property, the sellers and buyers are linked together in a chain because each sale requires the purchase of another property. As new builds deal directly with the developer as opposed to a private seller, the likelihood of the sale falling through due to the chain being interrupted is reduced, making them lower risk and easier to buy.

This is especially beneficial for first-time buyers who are often at the bottom of the chain and therefore more likely to experience delays due to any link in the chain being broken.

#2 More Economical to Run

New builds tend to come with top energy efficiency ratings. Not only is this an attractive factor when it comes to reselling the property, it also makes them cheaper and greener to run which can save homeowners on energy bills. 

You can be sure that you are getting a high-quality product that has been built to modern standards and regulations. Additionally, as everything in the house is brand new, new builds typically come with lower repair costs and are less susceptible to problems thanks to the latest building practices and technology.

New builds also come with a higher level of security than older properties, thanks to modern locks and smart home systems. These can be very useful in helping keep your home safe and secure. 

Furthermore, new builds are usually located in newly developed areas which tend to have better amenities and infrastructure, such as transport links, shops and restaurants. This makes them a great option for those looking for an easier lifestyle.

#3 New Builds Come with a Warranty

The National House Building Council (NHBC) covers all newly constructed property with a 10-year warranty. 

In the first two years, this ensures the developer will take care of any defects and for years 3-10 you’ll have builder warranty that covers any issues you may have with the property.

In the unlikely event of an issue, you’ll be able to contact the NHBC and they’ll be able to help you find a resolution. 

The warranty is also transferrable when selling your property, so any new owners will have the same protection. It’s worth noting that the NHBC will only cover issues related to building work and materials, not appliances or furniture, so it’s important to keep that in mind when making any claims. 

Additionally, any existing issues with a property before the warranty came into effect won’t be covered either.

#4 Developers May Offer Incentives

While it can vary by region, it’s quite common for developers to offer incentives to make purchasing a new build more attractive. These can include paying Stamp Duty Tax, legal fees or covering part of your moving costs to make it easier to move into your new home.

With the right developer offering the right incentives, you can find yourself in your dream home sooner than you expected. That’s why it’s important to do some research into what developers in your region are offering before you commit to buying a new-build property.

Incentives can also include extras such as furnishing packages, white goods and even appliances like TVs. It’s important to carefully check the details of any incentives offered to ensure you’re getting the best deal for your money. Additionally, it’s worth checking if any incentives are tied to a particular mortgage provider or lender, as this could limit your choice when it comes to finding the best mortgage deal.

#5 Customisable Features

As the owner of a new build is the first person to ever live in this property they’ll be able to customise its design to a certain extent – everything from the structure and layout to colour scheme and light fittings.  

The flexibility of customising a new build doesn’t stop there. Many developers now offer a range of options that can be chosen during the build process.

This makes it easier to put a personal touch on the property as well as make it as attractive as possible to tenants if you’re looking at buy-to-let. Additionally, these are all great ways to add value to your property and make it stand out from the rest.

#6 Lower Maintenance Costs

Since everything in a new build is brand new, the maintenance costs in the first few years are generally much lower compared to older properties. This can result in significant savings, reducing the overall cost of ownership and enhancing the investment’s profitability, especially in the initial years.

#7 Attractiveness to Tenants

For rental investments, new builds strongly appeal to tenants drawn to modern aesthetics, energy efficiency, and lower utility bills. The prospect of being the first to live in the property can also be a strong selling point. This appeal can lead to higher occupancy rates and potentially higher rental income compared to older properties.

#8 Eco-Friendly and Energy Efficient

New builds are constructed to adhere to current energy efficiency standards, which benefits the environment and can lead to lower running costs for heating, cooling, and lighting. This efficiency is increasingly important to tenants and can be a key factor in attracting long-term renters.

Is buying a new build a good investment?

Considerations and Potential Drawbacks

While investing in new builds can offer a range of benefits, there are also considerations and potential drawbacks that investors should be aware of. Understanding these can help you make a more informed decision and weigh the pros and cons based on your investment strategy and goals.

#1 Premium Pricing

New build properties often come at a premium compared to older properties. Developers price these homes to reflect the modern design, energy efficiency, and the convenience of moving into a brand-new property. This premium means that investors need to consider whether the higher initial cost is justified by the potential returns.

#2 Initial Depreciation

The concept of initial depreciation in the context of new build properties can be counterintuitive, especially given the widespread belief that real estate generally appreciates in value over time. While it’s true that real estate is traditionally seen as a solid investment due to its potential for capital appreciation, new build properties can be an exception to this rule in the short term immediately following their purchase.

Initial depreciation refers to the phenomenon where a new build property may lose some of its value in the first few years after purchase before starting to appreciate. This is similar to buying a new car, which loses a significant portion of its value the moment it leaves the dealership.

Reasons for Initial Depreciation:

  • Premium Pricing: New build properties are often sold at a premium, partly due to their brand-new condition, modern specifications, and the developer’s marketing efforts. This premium can artificially inflate the purchase price above the market rate for comparable but older properties in the same area.
  • Immediate Loss of ‘Newness’: Part of the appeal of a new build is its brand-new condition. Once the property is no longer new — meaning it has been lived in or another phase of development is completed — it might not command the same premium on the resale market, at least initially.
  • Market Adjustments: The property market continuously adjusts to supply and demand dynamics. If a developer has priced units optimistically and those prices are not supported by the broader market over time, new owners might find that their property’s value on the open market has adjusted downwards to align with comparable properties.

#3 Snagging Issues

New builds can come with minor defects or “snags,” such as issues with paint finishes or appliance installations. While developers typically address these problems within a warranty period, dealing with snagging issues can be inconvenient and may temporarily impact the property’s rental or resale appeal.

#4 Limited Negotiating Room

The price of a new build property is often non-negotiable due to fixed developer pricing. This contrasts with the second-hand market, where buyers can often negotiate prices based on property condition, market demand, and other factors. Investors might find less flexibility in securing deals below the asking price for new builds.

#5 Generic Character

Some investors and tenants prefer properties with unique characteristics or historical features that new builds typically do not offer. New developments, especially larger ones, can sometimes lack the individuality and character found in older properties, which might affect tenant appeal and rental prices.

#6 Development Risk

Investing in a property that is part of a new development carries the risk of delays or changes to the project. Economic downturns, planning issues, or problems with construction firms can affect the completion timeline, impacting investors’ plans.

#7 Market Saturation

In areas where multiple new developments are completed simultaneously, there might be a temporary oversupply of properties, affecting rental yields and making it harder to find tenants. 

Market saturation occurs when a particular area has an abundance of properties for sale or rent, leading to a surplus relative to demand. In the context of new build properties, market saturation can present several potential drawbacks for investors.

When more properties are available than buyers or renters, competition among sellers and landlords intensifies. This competition can lead to longer periods where properties remain vacant, directly impacting the return on investment for property owners. For new builds, where the initial investment might be higher due to the premium pricing, extended vacancies can significantly affect cash flow.

An oversupply of rental properties in an area can put downward pressure on rental prices as landlords compete to attract tenants. This can be particularly challenging for new build investors who have calculated their expected returns based on higher rental yields. In this case, reduced rental income may not sufficiently cover mortgage payments or yield the anticipated return, especially if the investor paid a premium for a new build property.

Market saturation can shift the bargaining power to buyers and renters, allowing them to negotiate lower purchase prices or rental rates. In saturated markets, potential tenants have a wider choice of properties, meaning landlords may have to accept lower rents or offer additional incentives to secure tenancies. Similarly, buyers may negotiate lower purchase prices, which could affect the resale value of new build properties.

One of the primary appeals of property investment is the potential for capital appreciation over time. However, in a saturated market, the abundance of available properties can slow down the rate of appreciation. For new builds, which often command a higher initial price, this can mean that the property does not increase in value as quickly as anticipated, affecting the long-term investment return.

#8 Community and Amenities

New developments may take time to establish a sense of community and may initially lack local amenities like shops, schools, and parks. Until the area develops fully, this could affect the desirability of the property for some tenants or buyers.

Financial Aspects and Market Trends of The New Builds

When considering investing in new-build properties, understanding the financial aspects and current market trends is crucial. These elements significantly determine the potential return on investment and the overall attractiveness of new builds in the property market.

Financial Aspects

  • Rental Yields: New build properties can command higher rents due to their modern specifications and energy efficiency, which can be particularly appealing in urban areas with high demand for rental accommodation. However, the initial premium price of new builds needs to be balanced against these potential rental incomes to assess the yield accurately.
  • Financing and Mortgages: Some lenders may offer special mortgage products or terms for new builds, potentially including lower deposit requirements or incentives. However, investors should be aware that some banks might have different lending criteria for new builds, sometimes requiring higher deposits due to perceived risks of initial depreciation.
  • Tax Implications: In some jurisdictions, new build properties may qualify for tax advantages or exemptions, which can enhance their investment appeal. It’s important to investigate potential tax benefits, such as reduced stamp duty, that could impact the overall investment return.
  • Maintenance and Running Costs: One of the financial benefits of investing in new builds is the lower maintenance and running costs, at least in the initial years. The energy efficiency of new constructions can also lead to lower utility bills, which is attractive to both investors and tenants.

Market Trends

  • Demand for Modern Living Spaces: There is a growing trend towards modern, flexible living spaces that cater to contemporary lifestyles. New builds that offer open-plan layouts, home offices, and tech-friendly environments are increasingly in demand, particularly as remote working becomes more common.
  • Sustainability and Green Homes: The market is witnessing a surge in demand for sustainable and eco-friendly homes, with buyers and renters valuing energy efficiency and environmentally friendly features. New builds that meet these criteria can attract a premium in the market.
  • Urban vs. Suburban: While city-center new builds remain popular, there’s a notable trend towards suburban new builds offering more space and access to nature. This shift has been accelerated by changing work patterns and a desire for more balanced lifestyles, affecting investment strategies.
  • Development and Infrastructure Projects: The potential for capital growth in new build properties can be significantly influenced by nearby infrastructure and development projects. Areas undergoing regeneration or where new transport links are being established often see an increase in property values.
  • Supply and Demand Dynamics: The balance between supply and demand in the housing market plays a crucial role in the investment potential of new builds. Areas with a shortage of housing supply but growing demand present opportunities for capital growth and strong rental yields.

How do New Builds Compare to Old Houses?

How do New Builds Compare to Old Houses?

Is buying a new build a good investment compared to an older house? When it comes to a new build vs an old house, there are some factors buyers may want to consider. 

A drawback for some buyers is that new build properties are said to have little character compared to older houses. If period property features such as high ceilings and ornate stonework are important to you, a new build may not be the right type of property. 

In addition to their character, old builds tend to be more spacious than new builds, offering more generous square footage, garden, and parking space.

On the other hand, older houses may be cheaper to buy and can often come with features such as fireplaces and features that can’t be found in most newly built properties. Older properties may also be located in more desirable areas than new builds. However, buyers should bear in mind that older homes may require some renovation work before they can be enjoyed.

Write Making an Informed Decision

Making an informed decision on purchasing a new build property requires a multifaceted approach, blending diligent research, strategic thinking, and professional advice. This process ensures that your investment aligns with your financial goals, risk tolerance, and long-term plans. Here’s how to navigate making an informed decision:

Research and Due Diligence

The cornerstone of any successful property investment is thorough research and due diligence. Start by investigating the developer’s track record. Look into their previous projects, focusing on build quality, adherence to timelines, and post-sale customer service. Reading reviews and speaking to current residents in their developments can provide invaluable insights.

Equally important is understanding the growth prospects of the area where the new build is located. Consider factors such as planned infrastructure projects, economic development initiatives, and trends in local property prices. Areas poised for growth may offer better potential for capital appreciation, enhancing the investment’s long-term viability.

Long-term vs. Short-term Investment

Consider how a new build property fits into your overall investment strategy. If you’re looking for a short-term investment, consider the current market demand for new builds and the potential for initial depreciation. 

For those with a long-term perspective, evaluate how the property’s location, quality, and features align with projected market trends and rental demand over the years. New builds can be particularly appealing for long-term investments due to their modern amenities and lower maintenance costs, potentially leading to higher rental yields and capital appreciation.

Consulting Professionals

Navigating the complexities of the property market and making a well-informed investment decision often requires the expertise of professionals. Real estate experts can provide insights into local market conditions and help identify properties that meet your criteria. 

Financial advisors can offer guidance on structuring the investment to align with your overall financial plan, considering factors like financing options, tax implications, and cash flow projections. Additionally, legal professionals specializing in property law can ensure that all necessary due diligence is conducted, contracts are sound, and any legal risks are mitigated.

Who Should Opt For Buying a New Build Then?

Buying a new build property can be an attractive option for various types of buyers, each with their own unique reasons for preferring a newly constructed home over an older property. Here are some groups who might particularly benefit from opting for a new build:

  • First-Time Buyers

First-time buyers can find new builds appealing because they often come with incentives that specifically target this group, such as government schemes that offer help with deposits or shared ownership opportunities. The simplicity of moving into a new property without needing immediate repairs or renovations is also a significant plus for those navigating the home-buying process for the first time.

  • Busy Professionals

For individuals or families with demanding work schedules, new builds offer the convenience of a move-in-ready home, eliminating the need for time-consuming renovations or updates. Modern amenities, energy efficiency, and often a warranty or guarantee can provide peace of mind, reducing the need for maintenance and allowing more time to focus on personal and professional commitments.

  • Investors

Investors seeking properties with good rental appeal may be drawn to new builds for their modern design, energy efficiency, and appeal to tenants who value these features. Additionally, the lower maintenance costs in the initial years can make new builds a more straightforward investment option, potentially offering higher yields in areas with strong rental demand.

  • Downsizers

Individuals looking to downsize, such as retirees or those whose children have left home, may find new builds appealing for their practical layouts and manageable sizes. Many new build developments offer properties specifically designed for this demographic, featuring amenities like security, maintenance services, and a community of like-minded residents.

  • Environmental and Energy-Conscious Buyers

New build properties are typically more energy-efficient than older homes, incorporating the latest technologies and materials to reduce carbon footprints and utility bills. Buyers who prioritize sustainability and energy efficiency might opt for a new build to align with their environmental values and save on long-term energy costs.

  • Those Seeking Customization

Some new build developments offer buyers the opportunity to customize their home before construction is completed, allowing them to select finishes, fixtures, and sometimes even the layout that best suits their taste and needs. This can be a significant draw for buyers who want a personalized home without undergoing a full renovation project.

  • Buyers Looking for Modern Living Standards

New builds are designed to meet the latest building regulations, offering high standards of safety, insulation, and accessibility. Buyers looking for homes that meet these contemporary standards without the need for upgrading may find new builds to be the best option.

Questions to Ask When Buying a New Build House

If you’re interested in buying a new build, there are a few things you should get clarified before proceeding. The first is to understand the incentives that the developer is offering with the new build, these can include covering legal fees and whether you are eligible for things like the Government’s Help-to-Buy scheme.

Understanding the construction timeline is also important. The timing for every new build will depend upon the developer. On average, it takes 3-6 months to purchase a new build, and sometimes the date you buy will affect how long construction takes. 

Potential investors in a new build should note that the end of development timeline can be a good time to secure a bargain. If there are only a few completed homes left for sale, many developers will be willing to negotiate as they will be eager to settle up and move onto the next project. Developers at the end of a project are more likely to be open to negotiation as reducing the price for a remaining property will not impact the sale price of the others (as they are already sold).

Also, thoroughly researching the developer before committing to any new build purchase is important. Make sure that their reputation is good and that they have a track record for delivering high-quality properties on time and on budget.

New Builds Worth Consideration

When investing in a new build, it’s important to look to where the market is strong and find an area that is up and coming, particularly if you wish to attract tenants. Here are some new build projects that property investors shouldn’t miss.

So, is buying a new build a good investment? Overall we think yes. Government and developer incentives make them attainable, particularly for first-time buyers, and they offer a lot less hassle in terms of repairs and not being in a chain. New builds tend to be a good option as they retain their value without the risks that come with older properties and they’re often located in markets that are up and coming or likely to remain attractive. If you’re interested in learning more about purchasing a new build, contact our team today.