There are three main questions we often get asked by budding investors.; ‘Why off plan?’ ‘What is off plan?’ And, ‘What does it offer me as an investor?’ Well initially, let’s dispel the usual confusion, and state that new build is generally the same as off-plan. Many people we speak to do get a little confused on this point so let me explain. Off-plan, or a new build development, is sold in advance of it’s practical completion, meaning that all developments are sold off-plan, in other words, from sets of drawings and CGI images, and not through conventional means of viewing the actual property. Very rarely is it the case where a developer will build out a project and then sell it when it is ready, that would be both costly from a funding perspective and secondly not a very efficient way of building as this would lead to a very slow delivery and build out of projects.
So now we have established that there is no real difference between new build and off-plan, we need to focus on why it is more beneficial to invest in new build/off-plan, in comparison to completed buildings. By completed properties, we are referring to resale properties, those previously owned, and generally property that is of an older age, but property that is ready to occupy immediately.
There are two main factors that ultimately should persuade you to follow the off-plan route. They consist of the price and the choice.
Factor One: The Price
When we say price, what are we suggesting? Well, the rule of thumb when it comes to the off-plan market is that properties are priced at anywhere between 5-15% below present market value, often these valuations are backed up with official figures from organisations such as RICS etc. The reason for this, is the developer realises that for a commitment from the investor, he needs to offer an incentive. Perfect, you now have an option to complete on a property discounted at today’s prices, and if you feel that the property market is in rude health and is likely to grow further whilst the construction takes place, then you are protecting the future value of your property, and avoiding the disappointment of missing out on any uplift in property prices.
When it comes to completed properties, there is no discount offered. These properties are priced at present market levels and you are therefore subject to open market forces where you are not only paying today’s prices, but you are likely to be in competition with other buyers, which in turn can lead to a bidding war, especially when markets are doing well. This is something you do not have to endure in the off-plan market, due to prices being set regardless of the demand.
Factor Two: The Choice
The second main point to discuss with off-plan, and a crucial one, is choice. Here you get the opportunity to pick an apartment that suits your requirements, possibly influence the finish and lastly, in a part of the building that you prefer. Remember if you are an investor, the key point to focus on is the ability to get a property at a great price, and although the right apartment is important, the rental market is not as fussy as a residential buyer and looks for location and value. Aesthetics do of course play a part, but are not as important as the first two. Choice in the resale market is limited by supply. Generally, you do not get a choice of multiple properties on one site like you do with a new build, meaning your choice is limited to the supply, dictated to by the sellers. Again, this is not ideal as very often the exact property you like very rarely comes up, and you end up compromising and settling for second best in a lot of cases, and no one likes to compromise too much.
Many of you may say that buying a property that isn’t built yet is risky, but in a property market where prices are still rising and more homes are greatly needed, this type of investment can be extremely rewarding. That’s why the sight of homebuyers queueing around the block when a development is released is commonplace, especially in the North-West. On a completed property there is zero risk that the property will not be completed, although there are other risks that occur. For example, the fact that many older properties do not have the same assurances you get with New Builds, namely NHBC warranties and the like that are issued and last for 10 years on a new build.
The Advantages: Off-Plan
So let’s go through the pros of off-plan. In terms of price, often your new home could be worth more when completed than you paid for it. Often you get discounts in excess of 5% from committing to an early purchase. You get yourself on the property ladder even if the property isn’t ready for a few years. You get a warranty on your property that generally lasts for 10 years giving you peace of mind for that period on the integrity of the build. You also get the opportunity in some cases to personalise your property at the very early stages. Also, remember you have no maintenance issues with a new build, whereas with an older property there is usually a lot of remedial work to undertake before you can either move in or rent out your property.
The Disadvantages: Off-Plan
What about the cons of off-plan developments I hear you ask? Of course, there are some that exist, but these tend to revolve around the funding and risk you take on when buying before the building is completed. Firstly, the funding. The majority of lenders do not offer mortgages designed for off-plan properties, and hence the reason for this space of the market being dominated by investors with a high proportion of cash. When it comes to funding, mortgage lenders tend to offer a mortgage in principle, and generally, these offers last for approximately 6 months, meaning that if your build does not complete in that timescale you run the risk that your circumstances could be different. There is also the risk that the developer may go bust. Well, despite our robust checks we can never guarantee that a developer will not go bust, however, what we can do is check how the project is funded and what deposit protection they have in place in case such incidents arise.
Many developers these days do not see the cash from the get-go and get drip-fed the money as the project progresses under a certification process ensuring that in most cases the money is only ever used for the development as and when it reaches certain milestones. So, as with any investment, there are risks, but it is your and our job to mitigate as many of these as we can, although in our opinion the markets have come a long way since the early dark days when developers went bust and clients lost their monies. So does off-plan make sense? Well from what I have discussed above it does, albeit with a few caveats, and as long as you are fully aware of the risks, small as they may be, then generally the off plan market offers the smart investor, or a keen residential client, the opportunity to purchase their dream home in the part of town they like, at a great price!