Off-Plan Property Investment

A personal view by Stuart Law, Chief Executive of Assetz plc

How Investment in Off-Plan New Build Property Can Seriously Improve Your Wealth But Carries Risks

Off plan investing is defined as buying property from developers before the building is completed, sometimes well before the foundations are laid. Whilst in a poor property market this method of investment is much less used, it is a strong tool for the property investor in times of growth.

This method of buying has been utilised by a large percentage of property investors over recent years to seriously increase their net worth through property investment - so what are the benefits and what are the risks in doing so?

Benefits of Off-Plan Investing :

Developers will often offer Assetz for Investors a genuine discount in return for bulk purchase of units in a development, particularly if it is early on. They do this as development finance is easier to obtain and cheaper if the development is partially or completely pre sold.
These discounts provide you, the investor, with a cushion of profit in case of any problems. This additional profit can be substantial - for example if you have put down a 10% deposit and the discount was a true 15% off, then the property is worth 17.6% more than the price you paid - that means you have already shown a paper profit of 176% of your deposit. For example :

Take a discounted £85,000 selling price of a £100,000 property. Your deposit 10% of £85,000 = £8,500, the equity in the property = £100,000-£85,000+£8,500=23,500 - a 176% return on your £8,500!

When completion comes and you put down a further deposit to bring your total deposit to 15%, even if prices have not risen any further you still have equity of £12,750+£15,000= £27,750, a 117.6% return on your deposit! If prices increase even just a little then your profit will be substantially greater due to your geared investment.

No interest to pay whilst the building takes place, yet if prices are rising you receive this capital gain.
With deposits often well under 15% at exchange on off-plan developments you have less cash tied up than if you had put down 15% deposit on a completed development.
No need to find tenants, pay for furniture or pay interest in any void periods.
If prices fall you have a safety net represented by the amount of the property discount - people buying on the open market would have NO SAFETY NET! A 10% discount would effectively provide you with a 10% market-price-fall insurance policy!
You can sell on to a buy-to-live owner later on before or just after completion to take out your capital and profit.

Risks of Off-Plan Investing :

The benefits of off-plan investing, taking a long term view, far outweigh the risks - however if you are taking a short term view and intend to buy and sell very quickly then be careful and keep a close watch on the local prices in the area to minimise your risk. In poor or falling property markets off plan investing can be dangerous.

The key problems with off plan investing are related to the benefits. by committing to purchase a property well in advance of its completion you are minimising the outlay to take a stake in the future potential growth. However, if the property market falls over this period you are committed to purchase the property that may be greater than the valuation at point of completion. Whilst clearly financially costly, the solution is to put down a larger deposit and stomach a short-term capital loss before prices recover. If the property purchase has not exchanged then the investor can walk away from the transaction and in all likelihood would only have costs of reservation deposits and possibly some legal and mortgage costs. If the investor wishes to pull out after an exchange than they are at risk of being sued for damages for the loss of profit on the sale from the vendor or being sued for specific performance to complete under the contract by the vendor.

The critical success factors in succeeding in off-plan investing are :

Obtain genuine discounts or buy in property hot-spots.
Buy in a rising market ideally to further extend your equity and hence safety margin.
Buy in good rental locations to ensure your mortgages are well covered to at least 130% at the new valuations.
Buy in good rental locations to ensure rent shortfalls will not eat into your equity and reduce your portfolio growth ability.

Find out how we can help build your balanced portfolio for you with clever use of funding and discounts at one of our Members’ days or contact one of our team today!

See all of our other property investment articles here.

Testimonial

‘I only needed to deal with [Assetz] as you could provide me with the whole end-to-end service: from finding the property, to arranging the mortgage, to finding the letting agents…All contacts I dealt with were extremely helpful and professional. Would definitely use you again.’

L Sheeny

Risk Warning and Disclaimer :
The price of property can go down as well as up. Historic performance should not be taken as a guarantee of future performance. Geared property investment with mortgages can increase risk of losing money as well as increasing the possible gains. Mortgage products referred to in the website can be withdrawn by the lender or have rates or other terms changed without notice and reference to any products does not imply they are certain to be available in the future. Mortgages referred to may also have certain applicant restrictions and are for indicative purposes only although reasonable endeavours have been used to ensure that they are available at the time of publication and are applicable to a significant number of our purchasers. This site is for information purposes only and nothing on this site should be taken as definitive investment advice for your particular situation without you seeking additional guidance directly from ourselves or from other finance and property professionals. Property particulars on this site do not form part of an offer or contract. The developer and Assetz for Investors Ltd, whilst endeavouring to ensure complete accuracy in these property particulars, cannot accept liability for any errors. Valuations of property or indicated rents achievable are either estimated or derived from valuations and/or comparables and can change and should not be relied upon without your own additional valuation and research, but we have carried out reasonable endeavours to achieve accurate indications for these figures. All descriptions, dimensions, areas, reference to condition and, if necessary, permissions for use and occupation and their details, are given in good faith as provided by the developer and are believed to be correct. However, these are subject to change, especially, but not wholly, relating to any property that is off-plan or not yet complete. Any intending purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to their accuracy. The onus is on each individual investor to undertake their own due diligence, enquiries and inspections. Our standard Terms and Conditions of Sale will apply. E. & O. E.