Tuesday 12 February 2008

Spotting a good derelict property investment

If you can believe recent reports appearing in the media recently and Government press releases, Britain is on the verge of a housing crisis.

The shortage is considered to be so dire that Gordon Brown even wants to build on flood plains. Yet a new report from Halifax shows that there are almost 290,000 houses standing empty across England, a figure that has fallen by just 6% since April 2003, despite the property boom.

That’s far more available properties already in existence that the Government’s housebuilding target of 240,000 properties a year and the Halifax figure is conservative.

The Empty Homes Agency estimates there are 850,000 empty dwellings across the UK.  Moreover, most of these are exactly the type that are in demand, family houses rather than city centre flats. So why are they empty?

A very small proportion of abandoned homes are due to property speculation. Property investment has hit such feverish levels over the past few years that some people are buying homes purely for the investment potential and don’t want to find tenants.

These ‘buy-to-leave’ investors target the new-build market as they want to maintain the ‘new-build premium’.

Booming house prices mean they’ve relied on the capital gains of a property rather than the regular income of a tenant. This sort of ploy will, of course, die out with the end of the house-price boom.

But most empty homes are deserted due to ownership arguments, or are in need of repairs beyond the budget of the owner. Apart from simply being a waste of housing stock, these abandoned homes also cause problems as they are also targets for crime.

In 2003, a Hometrack study reported that a property next to an empty house sells for 18% less than one with an occupied neighbour.

So what is being done about the problem? The Government has announced a number of measures to try and bring empty homes back into use.

Firstly, Chancellor Alistair Darling has extended the VAT reduction that applies to renovation work on empty houses.

A property needs to have been empty for two years now, rather than three, to qualify for a discounted refurbishment VAT rate of 5%. With the average renovation cost being estimated at £29,824, that is a £3,730 saving.

Local authorities are being encouraged to reduce the 50% discount on council tax for empty properties. On top of this homes that are returned to use are now included within the Housing and Planning Delivery system, which gives financial incentives to councils that meet building targets.

Derelict homes are a difficult investment prospect for numerous reasons. Local councils have the power to take over the management of empty properties under an Empty Dwelling Management Order (EDMO), meaning they can renovate and let property, but they are not permitted to sell it.

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