Could a ‘sweetener’ tempt you to buy a new home?

You want to buy a new-build apartment but can’t decide whether to take the plunge. What if the developer offers to pay your stamp duty? Does that help? What about a contribution to your mortgage? How about $1mn towards a new interior?

As property markets falter across the UK, Europe and the US, homebuilders are going to ever greater lengths to get buyers to commit to a purchase.

In February, 34-year-old New Yorker Agata bought a new-build home in Brooklyn. Aside from negotiating $50,000 off the $545,000 list price, her buying agent also got the developer to pay most of the 4.5 per cent state property sales tax.

“Without the concessions, I would have been on the fence,” she says. “The home didn’t feel like a slam dunk and it felt like a buyer’s market: if I didn’t go for this one another would come around.”

“People are trying to put deals together and concessions are a great way to make it happen,” says Ryan Serhant, a top-end estate agent in Manhattan. “Although a lot are not made public.” 

Serhant recently worked on the sale of a home listed for $66mn in which the developer paid just under $1mn towards the New York mansion tax (a surcharge levied on the city’s high-value homes) and, he claims, included $1mn interior design credit.

“Many more brokers and developers are offering mortgage ‘buydowns’ to reduce the impact of higher mortgage rates,” says Drew Boland of Proper Rate, a Chicago mortgage broker.

Mortgage buydowns, where developers pay lenders a lump sum to reduce buyers’ mortgage repayments, have become widespread in the US. In December, 75 per cent of homebuilders offered the incentive, according to a survey by John Burns Real Estate Consulting, a housing research company. Helped by the measure, total new home sales increased by 7.2 per cent in January compared with December, while second-hand home sales fell 0.7 per cent.

“From nothing a year ago, incentives are now common,” says Peter Rabitz, a Berlin-based estate agent who specialises in selling high-end properties. On West Side Sky Suites, a development he is selling in the popular Charlottenburg neighbourhood, the developer is offering a new kitchen, a fireplace and property tax payments worth up to €197,400.

“Affordability constraints mean that very few of London’s new homes are sold to local individuals without a major incentive,” according to a January report by Molior London, which tracks the new-build property market.

Since March, on its development in Bexleyheath, south-east London — where the cheapest home is a one-bedroom apartment for £285,000 — housebuilder Bellway has been offering buyers £1,000 per month towards their mortgage costs for up to the first year.

Steve Mariner, group sales and marketing director at Barratt Developments, the UK’s biggest housebuilder, says the company is currently offering incentives, such as mortgage and deposit contributions and help with buyers’ moving costs, worth up to £30,000.

£1,000


Monthly contribution to buyers’ mortgage payments offered by one UK housebuilder for up to a year

Offering “sweeteners” is nothing new. Back in 2017, The Telegraph newspaper reported how the contents of a luxurious show flat near Hyde Park — worth £400,000 — were included in the sale of a £9.5mn penthouse. The vendor of a £25mn mansion in Mayfair threw in a Rolls-Royce Phantom, worth £350,000, to get his buyer to commit.

But why offer incentives at all? As property prices decline and new-build sales fall — down 38 per cent in London in the past year, and 56 per cent across Manhattan and Brooklyn — why don’t developers simply start lowering the price of their homes?

“Developers are trying not to cannibalise future sales by setting a lower price bar, or alienate earlier buyers with visible discounts,” says Jonathan Miller, professor of market analysis at Columbia University in New York.

“They don’t want a lot of owners with posters outside their homes complaining they [overpaid],” says Neal Hudson, a UK housing market analyst and founder of BuiltPlace.

There is a more fundamental reason, too. “Price is essential,” says Thomas Zabel of Savills in Berlin. “That is what the developers have to report to the banks who are funding [them].” Falling sale prices could result in housebuilders having to renegotiate their financing and may involve paying higher borrowing rates or provide more equity.

Despite the disadvantages of lowering their prices, some housebuilders see
no alternative. In Berlin, developers are quietly asking agencies to come back with offers, says Rabitz. The average price on the “small handful” of apartments that he has sold in the past six months in Berlin is between 10 per cent and 12 per cent below list price.

“On West Side Sky Suites, prices range between €1.59mn and €3.29mn — but the seller will be happy to negotiate,” he says.

The average discount of a new home sold in Manhattan in January and February was 1.7 per cent below listing price, according to PropQuery.

Individual sales are going for much bigger discounts. In September last year, an apartment at 35 Hudson Yards sold for just over $35mn. Its original asking price was $59mn.

In the UK, incentives are effectively limited by the finance disclosure form, which must be submitted to the mortgage lender. Too many incentives and the bank will drop its valuation of the home, and the amount it is willing to lend. “There’s a rule of thumb among developers that they can’t really give more than about 5 per cent or 6 per cent in kind,” says Richard Donnell, head of research at Zoopla, a property portal.

But should buyers ever be tempted by sweeteners?

“If you have a mortgage, certainly not,” says Henry Pryor, a UK buying agent. “Never accept the show home perks or the stamp duty payment; you’ll be paying for it in your mortgage over 25 years. If you’re being offered inducements, clearly there’s a deal to be done on the price.”

At the current rate for the average five-year fixed mortgage of 4.97 per cent, according to financial information company Moneyfacts, that “free kitchen” worth £20,000, would cost £994 per year more in mortgage payments than if the £20,000 was cut from the purchase price.

Never accept show home perks. If you’re offered inducements, clearly there’s a deal to be done on price

Even for cash buyers, a developer’s offer to pay the purchase tax on a home will have a smaller financial benefit than reducing the headline price, since sales taxes are calculated on that amount.

Falling sales are only part of the problem developers face: rising inflation, supply chain issues and higher interest rates have pushed up the costs of building and financing new projects. “It’s the perfect storm for developers,” says Garrett Derderian, a New York-based housing analyst.

“In Germany, the very low margins our developers work on make rising costs for materials and finance particularly difficult,” says Rabitz. Zabel says one luxury developer in Hamburg, which he declined to name, has just bought back the four units it had sold off-plan to buyers, so that it can cancel the project entirely.

On top of repaying the buyers’ deposits — which ranged from €150,000 to €300,000 — the developer paid each buyer between €70,000 and €175,000 to cancel the contracts and reimburse purchase taxes and other costs. “It was very expensive, but the developer knew that he would lose much more if he went through with the development and tried to sell into this market,” says Zabel.

In the UK, tighter planning rules are only adding to the costs. Last October, the Home Builders Federation (HBF) said that changes to tax and regulation would add £20,000 to the cost of building a new home by 2025. Yet more regulations have followed: in December, it was announced that residential buildings over 30 metres in height will require two staircases — a response to the Grenfell Tower fire, which killed 72 people in 2017. In February, the London mayor Sadiq Khan announced new air-quality regulations that will impact developers.

Deteriorating economics have been reducing supply for several years. In 2022, 18,067 homes were started in London, down from a post-financial crisis peak of 33,775 in 2015, according to Molior London. With adverse conditions for developers set to endure, this trend is likely to continue.

“As prices fall and costs increase, [the major] developers mothball sites, waiting for prices to recover — that reduces housing supply,” says Darren Baxter, housing policy adviser at the Joseph Rowntree Foundation, which lobbies to address housing poverty.

Housebuilders’ falling profits will reduce their appetite for building in the future, he says. In October, Barratt Developments issued a profit warning. “The sector already has a shortage of construction staff: if developers address falling profits by laying off staff, this will reduce their ability to build homes [even further],” says Baxter.

In the year to September 2022, planning approvals for new housing developments fell in 11 out of 12 regions in England and Wales, compared to a year earlier, according to the HBF.

The withdrawal of the government’s Help to Buy scheme in England from October 31 last year is likely to accelerate the falls. Estate agency Savills predicts that new-home sales will drop from 145,000 in 2022 to 90,000
in 2023.

“In London, there have been very few planning applications for new developments this year,” says Sam Long of Molior London.

In 2019, 32 per cent of London homes were bought using Help to Buy, according to Molior. Without it, more homebuilding will be concentrated in areas already unaffordable for most Londoners, as developers look to corporate landlords and overseas buyers.

“The positive thing about Help to Buy was that it opened up much wider areas for regeneration,” says Long. So-called “build-to-rent” operators favour locations, such as those near Tube stations, that are already popular and expensive. “And the next big hope for developers is selling overseas, which means areas with a history, that people in Hong Kong and Singapore can Google easily,” he adds.

As prices fall and costs increase, developers mothball sites — that reduces housing supply

The European build-to-rent market has taken off in recent years, with investors pouring in €399bn since 2013, according to Knight Frank.

A decade ago, corporate landlords bought about 8 per cent of new homes in London, according to Molior. In the last three months of 2022, of the 3,234 sales that took place in the city’s top-selling schemes they bought 1,295, or 40 per cent of the total. Overseas buyers bought another 1,053; and just 298 went to individual UK buyers (including the last of those to use Help to Buy).

In Berlin, overseas buyers have evaporated. “In 2021, we sold an entire development on a roadshow to Beijing and Singapore,” says Zabel. “Today, we wouldn’t consider a tour. The demand is zero: I have colleagues in Hong Kong telling me please don’t send us developments, our customers aren’t interested.”

As home ownership in Europe’s cities moves beyond the budget of many residents, the growing concentration of urban homes in the hands of large corporate landlords is a cause for concern among housing campaigners who claim they provide expensive flats that do not address the housing affordability crisis.

“Big profit-driven corporations and investors cannot be relied upon to own and manage large blocks of flats for the benefit of tenants,” says Leilani Farha, who was the UN special rapporteur on the right to housing until 2020, and today campaigns on housing rights.

In a September 2021 referendum, Berlin residents voted for the forced purchase of up to 240,000 properties belonging to large corporate landlords, to turn them into affordable housing. As yet, there remains no legal means to do this.

Back in Brooklyn, incentives offered by developers keen to avoid cutting their prices remain common. Sandy Abbas, the agent who found Agata her home, starts all negotiations in that neighbourhood asking for 4 per cent of the sale price in concessions.

But price cuts continue. Back in December, Agata rejected one home she liked when the developer refused to cut its $525,000 price tag. “By the time I completed my purchase in February, I saw it was under contract for $495,000,” she says.

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