Why are lenders cool on studio or managed apartments?

Studio apartments may seem an ideal way to get a foot in the property market, or  an attractive high yield addition to an investment portfolio, but lenders aren’t very keen on them. A person might find getting finance on a 2 br unit or a house no problem at all, but the same person looking at a studio will have to find a bigger deposit and face less favourable terms. Why is this so?

The most obvious reason is simply that you can always build more apartments. A house comes with land, and – apart from Dubai and some volcanic islands – no-one is creating more land. With apartments however, developers can sense demand and build up higher and higher, or fill land where houses once stood. Occasionally they’ll become far too excited and build too much to be bought at any given time.

This keeps a lid on prices or might even cause them to drop. This is what really has lenders on edge. They fear that if there is a glut in the market from over enthusiastic development, they will be left with a security that is worth less than the money they are owed. They therefore want to create a bigger buffer by insuring the buyer provides more of the purchase price so that any price drops don’t affect the lender.

This makes sense, but why are studios even less attractive than normal apartments? You can stack two and three bedroom flats on each other as much as you can with studios and studios often give an investor a much higher return.

The answer here is that studios are only suitable for a small number of people. Who wants to live in 25 sqm unless they’re young, low income, single and don’t intend to live there indefinitely? Not many! Even though this limited demand is already reflected in lower prices, lenders aren’t interested in the rental return they simply want to make sure that they can sell a property quickly if they foreclose. The buyers are out there, but they can’t be found as quickly as the lenders would like. So they tend to be wary.

Likewise returns on student accommodation can be very attractive, however keep in mind that apart from improving an investors ability to service a loan, the lender has no interest in rental returns. Any managed property such as student or even serviced apartments have a more limited market into which the lender can sell the property ie: if the management agreement gives the manager exclusive rental rites for say 2 years then the property can’t be sold to owner occupiers and therefore the potential number of buyers is dramatically reduced.

When buying property remember that lenders are cool on properties which are less likely to hold their value because it is easy to produce more. They also don’t like properties that they can’t sell quickly to a wide market if they foreclose. Finally keep in mind that if you encounter obstacles raising finance on a studio, when it comes time to sell your prospective buyers will also encounter obstacles, even further reducing the potential market.

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