In this article, we examine the market for flats over the last year, and look at whether now is a good time to buy.
- Why flats became less popular during Covid-19
- Why now may be the right time to buy
- The resurgence of the flat market in London
- Expert views from estate agents
- Leases on flats
- Frequently asked questions
So, if you are a first time buyer, want a new home in the city, or are considering a flat as an investment, dive in!
Why flats fell out of favour
- Covid-19 led to a drop in demand for flats for two reasons: firstly, because people sought homes with gardens and secondly, working from home created the need for space to make an office, which proved difficult in many small flats.
- The working from home trend changed people’s search criteria; employees left city centre flats to live further away and commute to work on less days a week.
- The removal of tax reliefs, such as mortgage relief, for buy-to-let landlords put many off investing in more properties while others have decided to sell.
- The cladding scandal following the Grenfell Tower fire has left many flats with cladding issues virtually unsellable.
- Flats are traditionally slower to sell than houses.
- Many city centres have seen increasing numbers of flats being built, which are often criticised for their small dimensions.
Why flats may now be a good buy
- Flats may offer better value than other property types: Rightmove data in August 2021 showed the price of flats rose by 1% since Covid-19, whereas sold house prices rose by 10% which presents an opportunity for the first-time buyer, especially as the majority will be exempt from paying Stamp Duty.
- The Land Registry’s UK house price index for February 2021 – February 2022 shows that flat prices have seen little variation, with price increases below sold house prices for all other property categories.
- Less competition for flats than houses.
- City centre populations are rising.
- A sector of people still wants to be close to shops, offices and city centre attractions.
- For investors, the gap between demand and supply means that rental value growth remains strong, at 10.2% in the year to February 2022 according to Savills (April 2022), with no sign of an increase in the supply of rental properties. In a previous article, 24housing considers the best places to invest in buy-to-let property.
Resurgence of the market for flats for sale in London
Marc von Grundherr, Director at Benham & Reeves estate agents in London said:
The flat market is variable depending upon location. In some areas of London there has been an oversupply of flats in recent years, however, since the pandemic we have also seen a slowdown in new developments, and so there has been a re-balancing of the market.
London is also different to other regions in that flats are favoured by owner occupiers and buy-to-let investors more so here, and therefore whilst the capital’s market has been challenging since 2018 or so, with various obstacles thrown at it from the spectre of a no-deal Brexit to Covid and so on, it is now seeing a resurgence in demand as regular buyers and investors return – especially those from overseas, as restrictions lift here and abroad.
My forecast is that the London property market will accelerate in price growth in 2022 and 2023 versus the regions. London is London, after all and offers not just a reassuring financial return for property buyers but is also a destination like no other in cultural, commercial and financial terms. Never underestimate it as the world’s favourite city.
My advice when considering the purchase of an apartment is to use a good estate agent that has local offices and is well-established. If you are not a native English speaker, then find an agent that has a team that speak your language. Where the deal itself is concerned, it’s important to understand your ‘on costs’ – in other words, ground rent and management and maintenance charges and above all, look out for blocks that have cladding and do not have an EWS1 certificate to approve them as safe. There are thousands of such apartments throughout the country that are currently in limbo, and you should avoid any purchase that has a ‘cladding story’ to it.
Evidence of renewed interest in flats for sale in London is enforced by Frances Clacy, associate director of residential research at Savills, who said in their April Housing Market Update:
In a clear sign of back to work thinking, London prime flats began to see more significant price growth for the first time since the lockdown and more urban locations such as Canary Wharf, Islington and Shoreditch outpaced leafier suburbs.
A two bedroom flat in Arctic House (pictured above), 3 Heritage Avenue, Beaufort Park, Colindale, London NW9 is for sale with Benhams, priced at offers in excess of £375,000. It’s on the fifth floor, spans 566sq ft, has a parking space and is within walking distance of Colindale underground station. There is a residents’ gym, swimming pool and on-site restaurant. 982 years remain on the lease.
Strong demand for buy-to-let flats
Managing director of Chester estate agents The Rickitt Partnership, Tim Rickitt said that Chester has always had a good supply of flats which can be rented out very quickly, but they will not necessarily make as much money for their owner as a house, because it’s a smaller market. He commented:
In terms of capital growth, if you were to buy a house and a flat for £300,000 each, and sell both in five years’ time, you will make more money on the house. Both, however, will let very quickly.
Flats have bounced back since Covid, when many people decided they wanted a home with a garden; now that city centres have fully reopened, people want to be able to walk to the shops or be close to their work.
The buy-to-let market for flats is strong, especially with some people wanting to buy a flat to run as an Airbnb, however, a lot of flats have restrictions in the lease stating that they can’t be used in this way. Landlords still feel that they can get a good yield from renting a flat out and there are not enough flats for sale out there. Buyers are now wary of ground rents in relation to flats since Persimmon Homes and other developers made the headlines for getting greedy over ground rents. It is important to ask the right questions of your estate agent or get your solicitor to examine the terms of the lease.
Mr Rickitt believes that inflation and heating bills will calm the market and pointed out that flats are cheaper to heat, often being located between other flats and in well-insulated, new-build developments.
Managing director of estate agents Free Agent 247, Dan Lewis, commented:
Coming out of Covid-19, we are seeing signs of an early resurgence in the market for flats as people are moving back to cities, first time buyers want new homes and investors are looking to buy properties to rent out. Although sold house prices are rising, buying a flat is a possibility for many people as they are more affordable as a property type. Any apartment with a balcony or access to outside space will be more sought-after post Covid-19. Whereas 18 months ago some flats would have stuck around on the market, they are now selling within a few weeks, even with outside space.
Regarding leases, the majority of people do their research and are very savvy on the whole. They realise that a shorter lease creates difficulties with saleability and lendability which is a big factor; lendability gets harder the less years that are on the lease.
Buyers also want to know what they are getting for their money in terms of service charges and ground rent and like to see breakdowns of these. Communal areas have also become more important since the pandemic, and buyers want to know how the property management company is looking after them.
The key things to think about are the length of the lease: 100 years plus means you will get mortgage-ability and resale-ability. If a flat has outside space, it may well be worth stretching your budget to buy it; likewise, aim for the maximum beds. Also, be familiar with the property management company regarding ground rent; look closely at communal areas to ensure they are being properly maintained.
Mr Lewis operates in Worcestershire, Herefordshire and Gloucestershire and says the demand for flats is strong throughout these areas, especially in Cheltenham where a younger demographic is attracted to the town’s vibrant culture and beauty.
This two bedroom apartment at 2 Henwick House (pictured above), Tollhouse Drive, Worcester, is priced at offers over £325,000. Part of a handsome building built in 1850, the apartment covers 1582sq ft. It has high ceilings, a lounge, kitchen, two double bedrooms, a bathroom, cellar, garage and a garden. There are 991 years on the lease. Visit estate agents Freeagent247.
Flats are usually sold as a leasehold property type, giving the lease owner the right to live in the property for the number of years remaining on the lease. The terms of the lease clarify the conditions on which the leaseholder can live there and their rights and responsibilities.
Buying a flat with a short lease
Obviously, the value of a leasehold flat reduces as the lease gets shorter, and at the expiry of the lease it will revert to the freeholder, but this is of course reflected in the price. However, problems can arise when seeking a mortgage; lenders are reluctant to lend on properties with short leases and many consider a short lease to be less than 70-80 years. Lenders will have a `minimum expired lease term’ which they will lend on: you may have to pay a higher mortgage interest rate to secure a mortgage. However, properties with a short lease can offer opportunities for a cash buyer.
Extending a short lease
Leasehold owners have a statutory right to extend the lease under the Leasehold Reform, Housing and Urban Development Act 1993 (Guild of Property Professionals). To qualify, the leaseholder must have owned the property for at least two years and the original lease term must have been for at least 21 years. An eligible seller can initiate a statutory lease extension and, in some sales, the buyer will make this a condition of the purchase. If the lease has less than 80 years remaining, the leaseholder still has the right to extend but may have to pay more to the freeholder to do so. Professional advice should be sought.
Reasons for letting a lease run down
This option may work for retirees and those with no one to leave their estate to. It may also be viable for buy to let investors who calculate that their profits from renting the leasehold property out for the remainder of the lease may be more than the price they paid for it. The property reverts to the freeholder on expiry of the lease.
Frequently asked questions
Who pays to maintain and insure leasehold property?
Usually, the landlord maintains the shared parts and recovers the leaseholder’s share through the service charge (Leasehold Advisory Service).
What is a service charge?
Service charges are collected by the landlord, or a property management company, to cover the leaseholder’s share of maintenance and insurance.
What is ground rent?
This is usually a yearly charge paid to the landlord to cover repairs, maintenance and improvements.
What is a reserve or sinking fund?
Some landlords may collect funds from leaseholders towards major projects such as roof repairs or external decorating, to help spread the cost over a number of years. Leaseholders should be aware that the above charges may go up: the lease may contain details of how often this may occur.
Can you make alterations as a leaseholder?
To do this you will need written permission from the landlord.