New build or not new build

In recent years the government strategy to tackling the housing shortage has been by building new homes. Policies have largely been ineffective and slow due to obstacles along the way from various parts of the process e.g. local councils, inflation and just the fact that it didn’t make sense from an investment perspective. Recent changes to tax legislation last year may have tipped the scales more in favour for new builds. In Dunedin in the past 12 months there have been over 100 new builds started across the city. So this is particularly relevant for people investing in Dunedin property. Below we look at the pros and cons of investing in new builds.

Pros

Let’s start by looking at the positive things about a buying a new build.

1. The interest on the mortgage is still tax deductible. You can’t underestimate the size of this benefit when in the first few years of a mortgage the major part of the payment is interest.

2. The property is new and as such should have little maintenance and will come with builder guarantees for at least the first 12 months.

3. Dunedin has a lot of old stock and limited new properties so the demand for them is high.

4. New properties attract high quality tenants and achieve high rents.

5. The purchase price is often at an attractive level.

6. It’s easy. There are no auctions, no competition, no viewings, no offers rejected.

Cons

1. Buying off the plans come with a number of risks that need to be managed:

   a) you will have to pay a deposit before the build starts. This is not always safe and you may be asked to pay more along the way if there are

   b) Delays - in the current Covid environment everything is taking twice as long as expected. There may be increases construction costs and inconvenience.

   c) Does not meet your expectations - the pictures are just that so the actual finish may differ to what you expected.

2. Location is often less than premium. Developers favour land that they can acquire at a favourable price. This means that the value of your property comes proportionately more from the improvements than from the land itself. This will have a negative affect on future return on investment especially as the building gets old. In Dunedin, this means that a large number of properties are being developed in Caversham and Forbury.

3. Newbuilds are often semi-attached, small, with little off street parking or garden. The new builds I have viewed are nice but not large enough for my family. Developers do this to optimise and maximise the value from the land and make the price point attractive to investors.

4. Unforeseen body corporate issues and increased fees. I don’t claim to be an expert on body corporates but I’ve seen enough to know that they can turn into a nightmare fast. You just have to look at the long train wreck that is Waipori village just south of Dunedin.

5. As of 22 April 2022, Trademe has 658 homes for sale in Dunedin. That is a lot. If you have the time and energy you can most definitely find a better investment from the existing stock.

How can we help?

The list of cons may appear long but in reality most of these can be managed by being smart during the process. For example, get a lawyer to go over the sales and purchase agreement, make sure your deposit is in a trust account and not accessible by the vendor, buy from an experienced and reputable developer, and get investment advice from an independent local property management company before you buy.

Therefore, after weighing up the pros and cons we recommend buying newbuilds off the plan. Just speak to use first so we can help.