Why developers' gifts may not be all they seem

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The Independent Online

The atmosphere of pessimism in the property market is now so pervasive that developers are offering guarantees to investors that they will not lose money.

Guaranteed rents for a period after purchase are becoming commonplace, and one developer is even promising buyers that if they have to sell at a loss within five years, the loss will be made up.

Traditional inducements such as free furniture, mortgage holidays, free deposit, payment of legal fees and stamp duty, and cashback are all on offer. Are such gifts worth having, or do they indicate the building is not selling well and the developer is desperate?

Buyers should never skimp on market research, however attractive a deal looks in the glossy adverts. If in any doubt, get professional advice on how much rent will be attainable for the unit in that block, and calculate the yield. Ignore any rental levels suggested by the sales person.

John Hards, the managing director of one of Britain's largest letting agents, Countrywide Residential Lettings, says: "Investors should check the market to see if the flats are right for the type of tenant. If they are not, it should ring alarm bells."

In any event, Hards says, developers are taking less of a risk with rent guarantees than might appear. "Developers offering rent guarantees for the first six or 12 months are taking the period when it is easiest to find a tenant, because there are people who love to be the first in and enjoy the brand new décor and furnishings," he points out. The next tenant, on an unguaranteed rent, might be more difficult to find.

Hards also warns against buying outside the mass market. "We register 100,000 tenants a year who come to us to rent, and 75 per cent of them are looking at paying from £500 to £600 a month, so if you buy a very smart flat at £1,000 to £1,200 a month, you are cutting out most of the market," he says.

The Association of Residential Letting Agents (Arla) has been campaigning against rent guarantees. An Arla spokesman, Malcolm Harrison, says: "Arla is quite hot about this one. Rent guarantees are just a discount in disguise."

Rent guarantees are only crutches to reassure nervous investors, but many house buyers these days are more nervous about a slump in capital values rather than rents. For them, developers Countryside Properties (not to be confused with Countrywide Lettings) is offering to reimburse buyers of its homes if they are forced to sell at a loss up to five years of the purchase. They call it the Assured Value Scheme.

Michaela Lancaster, a sales director of Countryside Properties comments: "We believe that it is schemes such as these that will help instil more confidence. Our Assured Value Scheme is the first product of its kind, which offers an intelligent incentive appealing to people who want a quality home and a controlled investment."

It seems to have worked for Neil Anderson, a local authority officer who bought a five bedroom house in Lymm, Cheshire, with wife Jane. "The AVS is a safety net that has created a solid investment in a market that we feel isn't as robust as it used to be. The AVS helps me sleep at night knowing that my investment is foolproof." At the moment, the AVS is available only to owner-occupiers and there are a bunch of terms and conditions that buyers would be well advised to read carefully.

One rent guarantee scheme that is worth a look, however, is Linden Homes' offer to sell you a show home and then lease it back while they sell the rest of the development.

Under the "Show Home and Income Plan", Linden is offering a return of 7.5 per cent for a period between six and 18 months, and will clean, maintain and insure the property for the period of the lease. Currently on offer are the show houses at Locksley Gardens, Winnersh (£355,000) and Eastlands, Hemel Hempstead (£289,950), plus the show apartment at 96 Torrington Park, Finchley, a two-bedroom ground floor apartment for £370,000.

All are offered with a six month leaseback at 7.5 per cent return.