As the real estate landscape continues to evolve, understanding the dynamics of property values is becoming increasingly crucial. One area of particular interest lies in the relationship between existing housing stock and newly constructed properties—the phenomenon known as the 'new-build premium'.
In today's market, where the rise of build-to-rent developments has garnered significant attention, accurately assessing this premium has become more pronounced than ever.
While performing this analysis with abundant direct comparable sales and rental data points for planned developments may be relatively straightforward, it poses a challenge when "creating the market."
This situation arises when your development is the first of its kind in the immediate vicinity or when the last development was built several years ago. See Fig. 01.
In this article, we will explore various types of analysis that can assist in addressing this issue and how Bricks&Logic can provide valuable assistance in accurately assessing even the most data-sparse development opportunities.
As the real estate landscape continues to evolve, understanding the dynamics of property values is becoming increasingly crucial. One area of particular interest lies in the relationship between existing housing stock and newly constructed properties—the phenomenon known as the 'new-build premium'.
In today's market, where the rise of build-to-rent developments has garnered significant attention, accurately assessing this premium has become more pronounced than ever.
While performing this analysis with abundant direct comparable sales and rental data points for planned developments may be relatively straightforward, it poses a challenge when "creating the market."
This situation arises when your development is the first of its kind in the immediate vicinity or when the last development was built several years ago. See Fig. 01.
In this article, we will explore various types of analysis that can assist in addressing this issue and how Bricks&Logic can provide valuable assistance in accurately assessing even the most data-sparse development opportunities.
Where data is sparse, we need to make the best possible use of it by applying techniques that enrich and make it more relevant to our analysis. This involves updating older data points and finding robust and justifiable methods to equate properties with different characteristics to those we are comparing them against.
Where data is sparse, we need to make the best possible use of it by applying techniques that enrich and make it more relevant to our analysis. This involves updating older data points and finding robust and justifiable methods to equate properties with different characteristics to those we are comparing them against.
Using simple house price indexes for regions can be very risky. The UK market is not just a few regional markets but thousands of small ones that not only vary by hyper local locations but also property types.
Coming out of the last financial crash we saw expensive prime properties perform much better than their neighbours. Between 2012 and 2017 we saw this trend completely reverse as money was cheap for landlords to invest in buy-to-lets and the help to buy scheme provided support to those smaller properties targeted by first time buyers.
Finally, following Covid we saw the ‘race for space‘ and those larger properties with outside space perform far better than their smaller internal only counterparts.
To understand all these effects Bricks&Logic have created a property level index that takes into account the attributes as well as location of a property to give an accurate picture of its house value performance over time that is unique to itself.
Chart 01 shows an example of how two properties only a few hundred metres apart can act very differently. We also show how one region can have a huge disparity in house price performance (Fig. 02).
To understand more about how we do this please read our article on the Bricks&Logic property level index.
Using simple house price indexes for regions can be very risky. The UK market is not just a few regional markets but thousands of small ones that not only vary by hyper local locations but also property types.
Coming out of the last financial crash we saw expensive prime properties perform much better than their neighbours. Between 2012 and 2017 we saw this trend completely reverse as money was cheap for landlords to invest in buy-to-lets and the help to buy scheme provided support to those smaller properties targeted by first time buyers.
Finally, following Covid we saw the ‘race for space‘ and those larger properties with outside space perform far better than their smaller internal only counterparts.
To understand all these effects Bricks&Logic have created a property level index that takes into account the attributes as well as location of a property to give an accurate picture of its house value performance over time that is unique to itself.
Chart 01 shows an example of how two properties only a few hundred metres apart can act very differently. We also show how one region can have a huge disparity in house price performance (Fig. 02).
To understand more about how we do this please read our article on the Bricks&Logic property level index.
Aside from location the size of a property is the next most significant factor determining its value.
A common measure used to help determine the value of a property compared to a neighbouring one is the £/ft². However this can be an overly simplistic measure. The rate of £/ft²for a property can vary depending on its size, with larger properties typically commanding a lower rate.
However, the rate of £/ft² can also vary depending on the area in which the property is located. In cheaper areas, the rate of £/ft² tends to decrease at a faster rate as the property size increases. In contrast, in more expensive areas, the rate of £/ft² tends to decrease at a slower rate as the property size increases.
This means that larger properties in more expensive areas are likely to have a higher value per square foot than larger properties in cheaper areas.
See charts 02 and 03 as examples of just how different the rate at which £/ft² changes depending on the value of the property.
Aside from location the size of a property is the next most significant factor determining its value.
A common measure used to help determine the value of a property compared to a neighbouring one is the £/ft². However this can be an overly simplistic measure. The rate of £/ft²for a property can vary depending on its size, with larger properties typically commanding a lower rate.
However, the rate of £/ft² can also vary depending on the area in which the property is located. In cheaper areas, the rate of £/ft² tends to decrease at a faster rate as the property size increases. In contrast, in more expensive areas, the rate of £/ft² tends to decrease at a slower rate as the property size increases.
This means that larger properties in more expensive areas are likely to have a higher value per square foot than larger properties in cheaper areas.
See charts 02 and 03 as examples of just how different the rate at which £/ft² changes depending on the value of the property.
By having a property specific understanding of how prices have moved over time and how the average £/ft² changes depending on the location and value of a property we can equate the equivalent achieved price today of a set of existing properties relative to 'new-build' ones. By analysing the 'new-build' premium achieved by developments in the area we can then apply this to the specific existing properties in a given location to get an accurate estimate of expected 'new-build' value even without equivalent 'new-build' comparables.
See Chart 04.
By having a property specific understanding of how prices have moved over time and how the average £/ft² changes depending on the location and value of a property we can equate the equivalent achieved price today of a set of existing properties relative to 'new-build' ones. By analysing the 'new-build' premium achieved by developments in the area we can then apply this to the specific existing properties in a given location to get an accurate estimate of expected 'new-build' value even without equivalent 'new-build' comparables.
See Chart 04.
At Bricks&Logic we have created a highly accurate yield model that takes into account the location, type, size and value of a property to give an indication of the expected rental value a property can achieve. This means that even without comparable 'new-build' rents in the area you can get a good understanding of the expected value that is backed by a comprehensive models that see use the yields of surrounding areas for similar property types. By combining this with the 'new-build' premium analysis, with just a few clicks of a button a full value and expected income of a new development can be calculated.
At Bricks&Logic we have created a highly accurate yield model that takes into account the location, type, size and value of a property to give an indication of the expected rental value a property can achieve. This means that even without comparable 'new-build' rents in the area you can get a good understanding of the expected value that is backed by a comprehensive models that see use the yields of surrounding areas for similar property types. By combining this with the 'new-build' premium analysis, with just a few clicks of a button a full value and expected income of a new development can be calculated.
In conclusion, accurately assessing the 'new-build' premium and valuing residential properties requires a nuanced approach that goes beyond simplistic metrics like £/ft². When dealing with data-sparse situations or creating markets for unique developments, it becomes essential to enhance and enrich the available data. Bricks&Logic's data analytics solutions offer enhanced insights by making data current, considering property attributes, and analysing market dynamics. By combining this data and analytics together, Bricks&Logic enables accurate estimations of 'new-build' value and expected rental income.
We are in the process of building out specific applications that will help developers move beyond just simple comparables when providing evidence for investment decisions. If you would like to find out more or about any of the other services that we provide then please contact us at contact@bricksandlogic.com
In conclusion, accurately assessing the 'new-build' premium and valuing residential properties requires a nuanced approach that goes beyond simplistic metrics like £/ft². When dealing with data-sparse situations or creating markets for unique developments, it becomes essential to enhance and enrich the available data. Bricks&Logic's data analytics solutions offer enhanced insights by making data current, considering property attributes, and analysing market dynamics. By combining this data and analytics together, Bricks&Logic enables accurate estimations of 'new-build' value and expected rental income.
We are in the process of building out specific applications that will help developers move beyond just simple comparables when providing evidence for investment decisions. If you would like to find out more or about any of the other services that we provide then please contact us at contact@bricksandlogic.com
