Proportion of homes sold off-plan drops to lowest level in a decade

The share of new build homes sold off-plan in England and Wales has fallen to its lowest level in a decade.

Last year, a total of 34 percent of new homes in England and Wales were sold before they were built, up from a peak of 46 percent in 2016.

It is the fifth time in the past six years that the share of new-build homes sold has fallen, according to research from Hamptons.

The broker attributed the drop to a decline in landlords and real estate investors, who he says are the most likely group to buy off-plan.

It claimed the drop can be traced back to 2016 and the introduction of a 3 percent stamp duty surcharge on second homes.

The surcharge made it much more expensive for those who already owned a home to buy a second home or invest in an owner-occupied home.

In 2015, 70 percent of off-plan buyers were investors, a figure that will drop to just 12 percent by 2022.

At the same time, first-time buyers accounted for 67 percent of off-plan purchases last year.

The risks of off-plan buying

The risks of buying off-plan are well documented, especially when buyers can lose their down payment if their developer runs out of money to complete construction work.

In addition, an excessive delay in the construction process can result in the value of the finished home being worth less than you paid for it in the event that prices fall.

Traditionally, flats make up the bulk of off plan sales. They usually offer the highest returns for investors who buy into developments two or three years before completion.

However, investors have been put off by higher stamp duties and rising interest rates – and this has resulted in fewer off-plan flat sales.

Apartment sales have also suffered from scandals involving dangerous siding and toxic leaseholds. These issues have prevented many buyers from obtaining a mortgage on the affected properties, making them unsaleable.

In 2007, flats accounted for 71 percent of all new-build homes sold off-plan, a figure that had fallen to 53 percent in 2016.

By 2022, that share had dropped to just 38 percent due to a more aggressive tax environment for investors.

Hamptons suggested this reflects the pandemic shift, with owner-occupiers looking for homes with more indoor and outdoor space.

Households looking for more space

The shift away from matched investors means that, for the first time since at least 2007, new townhomes are 44 percent more likely to sell off-plan than flats.

With flats making up more than 90 per cent of new homes in London, the capital did not account for the bulk of new homes being sold off-plan for the first time in at least 15 years.

Last year, 44 percent of new homes in the capital were sold off-plan, up from a peak of 71 percent in 2016.

This figure was surpassed by the Northwest, where 45 percent of homes were sold before completion by 2022, a similar level to 2016.

Despite owner-occupiers accounting for an increasing share of off-plan purchases, developments in higher yielding areas, which are often solely focused on investors, continue to hold off-plan sales the strongest since 2016.

About 200 developments accounted for about half of on-plan sales nationally.

The share of new homes sold off-plan in areas where average rental yields exceeded 8 percent increased year over year, while a record 50 percent of new homes sold before completion were located in places where average yields above 10 percent.

Off-plan sales in the north of England, where landlords are increasingly looking for yields that work with higher interest rates, have remained the most resilient.

But off-plan sales have also held up more strongly in higher-yielding parts of the South.

As a result, flats outside London are more likely to be sold off-plan – at 44 per cent – than those in the capital, at 43 per cent. Hamptons said London offers investors the lowest average returns in England and Wales.

At the local government level, it is more profitable city centers where developers respond to investor demand, which top the list of places where the bulk of new housing is sold off-plan.

Luton takes the top spot for the first time with 83 per cent of all new homes sold before completion last year. Luton is followed by Manchester at 72 percent, Birmingham at 66 percent, Stoke at 65 percent and Brighton at 61 percent.

Typically, flats still dominate off-plan sales here, mainly in developments built specifically for investors.

At the other end of the scale, there were 57 — or 17 percent of — local governments where no new homes sold before they were finished.

These were rural or suburban places where new homes are usually detached or semi-detached.

Nationally, these homes are the least likely to be sold off plan: 23 percent of detached and 32 percent of semi-detached homes are sold before they are built.

North London estate agent Jeremy Leaf said: ‘The findings of this report are not at all surprising as we are deeply involved in the sale of brand new homes and land to put them on.

“We noticed quite a change in attitude towards the end of last year and into this year in terms of buyers and lenders.

“As real estate prices have slowed down and the economic outlook has become more uncertain, confidence has taken a hit and off-plan commitment has become increasingly risky, especially if you don’t know what the value of the property could be when it comes working.

“This uncertainty has also reduced the number of available new homes, while the withdrawal of the government’s share purchase scheme has also had a negative effect.”

David Fell, from Hamptons, said: ‘Smaller new homes are now being sold off-plan rather than flats.

“This reflects Covid-induced changes alongside a shift in who is willing to buy before a new home is completed.

“Demand on plan has steadily shifted from investors who buy two or three years in advance to first-time buyers who typically want to move within six to 12 months. However, the majority still want to wait for a finished product.’

He added: “Slowing price increases have also reduced the incentive for some buyers to get in early.

‘Ten years ago, investors who bought well before delivery often saw the value of their new home increase by 20 to 40 percent between exchange and delivery. But as price growth has slowed, buyers have generally become less willing to make purchases years ahead of completion.

Overall, the continued slowdown in the number of new homes sold off-plan, coupled with the end of Help to Buy, is hurting most homebuilders’ profits. Slowing sales numbers mean that some developers are slowing down the pace of work to reduce their risk.

‘Without a restart of Koophulp or replacement by a comparable scheme, in 2023 there will probably be far fewer homes being built in the short term than in recent years.’

The off-plan index uses new data on home sales from some 550 estate agents across the UK that are part of Hamptons’ parent company – the Connells Group.