Off-plan property investment is an investment strategy that involves buying a property before it is finished. Essentially, you’re basing your purchase decision on the plan rather than on the basis of the bricks-and-mortar result. Approached the right way, off-plan property investment can have many advantages over buying pre-built property.
To explain further, Mark Burns, Director of Pure Investor, provides his insight for what investors need to understand regarding off-plan property.
You’re effectively investing in the builder rather than the property
With pre-built property, you can research the property thoroughly (e.g. via surveying and conveyancing). With off-plan property investment, there is no property (at least not a complete one). You can, however, research the property builder. If they have a solid track record of delivering projects on time and to standard, then their off-plan options could be an excellent place to put your money.
The key point of off-plan property investment is that it should be a win-win for both the home-builder and the buyer. Home-builders are experts at creating homes. Like everyone else, however, they need money to make those homes a reality. There are basically two ways they can get this money. The first is through standard bank financing. The second is by offering investors properties at a discount.
From a home-builder’s perspective, offering investors properties at a discount fills two goals in one move. It gets them the money they need at a lower cost than bank financing and it gets the properties sold. From an investor’s perspective buying off-plan from a reputable builder allows them the potential for a significant return on their investment.
At a minimum, you’re guaranteed a discount on the future sales price. Often, however, you’ll also benefit from general house-price inflation over the building period. Then, of course, you get the benefit of house-price appreciation for as long as you hold the property. As a bonus, you also reduce your Stamp Duty liability since this is levied on the purchase price rather than the value of the finished property.
The specific advantages of off-plan property investment
For many investors, especially new investors, one of the biggest advantages of off-plan property investment is its simplicity and convenience. You don’t have to hunt it out or get into a bidding war with other purchasers. Instead, you just see what units are available, pick the one you want and pay for it. Typically, you put down a deposit and then pay the rest in stages as building milestones are completed.
You’re unlikely to be able to negotiate on the headline price for off-plan property. There may, however, be scope for negotiation around what is included in that price. For example, to upgrade certain features in your unit such as the materials used in kitchen countertops. Even if they don’t, you can often request paid-for upgrades. You just need to give the home-builder enough notice.
Once the property is completed, you have the option of using it yourself, selling it on or letting it out. As an investor, you’ll probably be looking at the latter two options. The former has the benefit of allowing you to monetize your gains immediately. The latter, however, will allow you to benefit from long-term yield, boosted by the relatively low purchase price.
If you choose to sell, you’re likely to see plenty of demand from both investors and residential buyers. The reason investors are likely to be interested in your property is that new-builds are superb buy-to-let investments. They’re inherently future-proofed against increases in standards for rental properties (e.g. energy-efficiency standards). They’re also highly attractive to both tenants and residential buyers.
In short, therefore, buy-to-let investors get a hassle-free property with great appeal to tenants. As a bonus, they also have a clear exit strategy if they decide they want to move on pastures new.
The challenges of off-plan property investment
By far the biggest challenge with off-plan property investment is making sure that you’re working with a reliable home developer. In blunt terms, the strong legal protection offered to off-plan buyers in the UK is only of value if the business still exists to pay compensation. If the business goes bankrupt, then off-plan buyers essentially just have to form an orderly queue with the rest of the company’s creditors.
If you choose your home-builder carefully, then the only real challenge is the nature of off-plan property investment. For example, the fact that you are buying in advance means that you will have to wait until you can see a return on your money. This, however, also applies to other forms of investment, notably bonds.
Financing can also be a challenge. That’s why off-plan purchasers tend to be cash buyers such as investors rather than residential buyers. Having said that, where there’s a niche, there’s usually a lender to cover it and off-plan purchasing is no exception. Your selection of lenders is likely to be fairly small and it’ll definitely help if you have a good credit record, but it is possible.
Your final challenge is the fact that a contract works both ways. In other words, just as the builder is committed to delivering your property, you are committed to paying for it. If this becomes an issue, however, you may be able to exit the contract by selling it on to another investor (again this is similar to how bonds work).
The nuance of location
The importance of location is something all capable property investors come to appreciate very quickly. It still very much applies to off-plan property investing but there is a bit of nuance. High-quality home-builders will only build homes where there is a need for them.
If, therefore, your plan is just to sell the property as soon as it is finished, then you can expect to have a lot of willing buyers regardless of the specific location. Even so, however, it may be worth your while to research different areas. You may find that some clearly outrank others in terms of the possible returns you can make.
If, however, your plan is to let out the property then you have a couple of further questions to consider. The first is whether you want to focus on short lets or residential lets. If the former, then you need to research local by-laws very carefully. If the latter, then you need to think about whether or not there is a particular demographic you want to target. If so, will the property appeal to that specific demographic?
This article was written by Mark Burns. Mark Burns is the managing director of property investment company Pure Investor, who specialise in UK property investment and Buy-to-Let Property Investment.