Setting out on your property investment journey for the first time, one of the initial concepts you will likely be introduced to is the idea of buying ‘off-plan’ - that is, securing a property prior to it being ready for occupation. Despite data suggesting the popularity of buying off-plan is somewhat in decline, it remains a buzzword in the industry, particularly amongst overseas buyers, property agents and developers. Indeed, in 2022, a third of all new homes in the UK were purchased in this way, according to Hamptons; in 2016, that figure stood at almost half.
In spite of it clearly being a prominent method of property purchasing, then, it may well be a strategy that buyers haven’t previously considered or understand in any great detail. With so much information and examples out there, it can be easy to feel bogged down, unable to wade through the details. Indeed, this might only be exacerbated by conversations with various property agents, all of whom are likely to offer their own opinions and who may well jump straight into making the case for or against certain properties.
In this article, instead, we strip back the specifics to examine off-plan investing as a concept – what to be aware of, what you might want to avoid, and why, done right, it can help to meet the objectives of prospective property investors.
Making the case for off-plan investment
Speak to any property agent and they will be able to list off a whole series of reasons why people buy off-plan. Examining these broadly, they can be broken down into three core fundamentals:
The potential for capital gains during the construction phase is likely to be the most prominent argument for off-plan investing, and it is easy to see the logic. Firstly, during the earliest phase of marketing, the developer is more likely to drive quick sales, in part because it is a strong momentum-setter, and also potentially because, at least in part, they rely on the funds for the development itself. Consequently, they are more likely to incentivise early buyers with discounts. They may also stagger the release of properties into phases, with the first phase being the cheapest and prices increasing incrementally thereafter. For these reasons, the earliest buyers often purchased for the lowest price, or secure the best deal.
In addition, a property’s value should increase as the risks associated with completion are reduced, thereby increasing demand. Not only does demand grow as risk falls, however, but also the physical presence and visibility of the property brings with it a wider audience of prospective buyers. This is particularly true of local, would-be owner occupiers looking for their future home. Whilst some people fitting this description do buy just by looking at the area, floor plans and brochures, they are far more likely to choose a property when they can see it, visit it, and get a much more accurate feel for what it would be like to live in. Again, therefore, time to completion should equate to rising demand, and with it, rising prices.
Finally, investors in off-plan properties aren’t just hedging on a growth in demand for the property itself; they are also banking on growth across the market and property prices more generally. Given the long-term reliability of the market, which, despite inevitable peaks and troughs, has a historically-proven tenancy to trend upwards, this is an assumption made on strong principles.
Another oft-stated benefit of buying off-plan is the ability to stagger payments, and to have a clear understanding of what is due, when. If a buyer, for example, is struggling to find enough cash for a full deposit once maximum borrowing limits are considered, then for an existing property they’d simply have to lower their budget. Investing in an off-plan property, however, usually involves staged payments. This varies from property to property, but a typical scenario would involve an initial deposit on ‘exchange’ of 10% to 20%, with the remainder on completion. Additional, incremental costs including stamp duty and mortgage costs are also pushed back to completion. If a buyer can raise the initial sum required, then, and is confident in being able to raise the remaining amount by the time of completion, it enables them to keep within the same budget, rather than compromise on price.
Similarly, but distinct from this point, buyers don’t run the same risk of accumulating hidden, or unforeseen costs during the process, as it is being purchased brand new. In contrast, a resale property may need refurbishment work before it can be lived in, the cost of which cannot be exactly known, and can often escalate far beyond initial projections. Buying off-plan simply removes that from the equation.
This ability to manage the process effectively also extends to the completion stage. Furniture is available as turn-key packs; solicitors are likely to manage multiple buyers, dealing with the same documents and contracts, and so are well versed with the process; lettings and management agents, again who are likely to be handling multiple investors, are on hand with a significant degree of familiarity with the properties, are armed with rental appraisals and marketing material, to market and secure tenants prior to handover. The network involved, and the stages involved, take the investor down a well-trodden path - one which, particularly for those unaccustomed to buying property or investing from afar, can help significantly in bringing a comfort-factor to the purchase.
On paper, then, investing off-plan clearly makes sense. Speak to many a property agent, too, and this overwhelming positive interpretation of off-plans is the view you are going to get.
There are times though, as with many things, where the concept doesn’t quite match up to the reality, giving rise, amongst some investors, to a stigma association with off-plan investment. Again, the concerns and negative feedback, whilst broad-based, can be broken down into a few core themes:
Paying a premium
In many ways, this is the counter-argument to off-plan property’s major selling point – that it provides a route to buying below market value. Contrastingly, a separate viewpoint is that developers, armed with glossy brochures and CGIs, can sell off-plan properties at a premium based on the proposed quality of the property and future visions for the local area and market. This is particularly true when it comes to selling to overseas buyers, where there is perhaps less knowledge of the local area, and when there could well be more comfort with a ‘condo’-type property. Aware of this, developers can, and unfortunately do, market their properties specifically to an overseas audience, emphasising the facilities and quality to justify a high price. Another associated strategy to entice buyers is to offer further incentives – chief amongst them a rental guarantee. Time after time, developments are advertised with a high, guaranteed net yield for a year or two – again, something that looks great on paper. Look beyond the headlines, however, and it’s often the case that these ‘returns’ are off-set against the premium on the property value, and thus the returns that the developer is making.
Taking on Risk
Again, this is the other side of the coin to off-plan's cash-flow management benefit. That is, whilst yes – the time between buying and completing on a property enables investors to spread their payments over a longer period – those payments contribute to a property that is not yet build. Therefore, the realisation of returns, and sometimes the prevention of losses, is dependent on the successful delivery of the property.
In recognition of this, there are measures in place within the UK to protect off-plan buyers. Firstly, there are long-stop dates in place, creating a specific timeline after which the buyer is legally entitled to return of their funds if completion has not taken place. Very often, part or all of the deposit will be protected via an insurance policy. Furthermore, if a developer does fall into difficulties during the construction phase, another developer may take on the site and complete the properties. However, whilst the UK is as reliable a market as any when it comes to the reliability of property development and the protections for buyers, these factors do not fully alleviate the prospects for lost money, or at least a time-consuming, messy process should the development fall foul of financial trouble.
Conclusion: Which Argument is Right and Wrong?
What should become clear, here, is that there are juxtaposing arguments related to buying off-plan. Whilst some argue for price growth potential, others point to premiums; whilst some benefit from the ability to spread payments, others would argue it’s just not worth the risk.
In reality, however, this dichotomy is significantly oversimplified. There is no right and wrong argument, much as there are no two off-plan developments that are the same. Where one line of argument might apply to one development, the opposite could equally apply to another.
What is undeniable at this stage, is that good quality, modern properties are growing in demand in today’s market. There are a combination of dynamics driving this, primary amongst them a rise in energy costs and associated costs of living in the UK, leading both owner-occupiers and renters to downsize, and seek energy-efficient properties to lower their monthly budgets. This in turn is being supported politically, with growing incentives to buy EPC A to C rated homes. Finally, lenders are playing a significant role too, introducing more and more ‘green’ mortgages to the market, enabling borrowers to benefit from lower rates in more energy-efficient homes.
Giving this trend, which shows no sign of slowing, there is definitely an argument that off-plan properties, done the ‘right’ way, can produce sound investments that are positioned well relative to current market patterns and preferences. The question, then, is whether this method of investing fits the buyer’s own risk-appetite, and if comfortable with the concept, how they navigate through the raft of information and examples available to identify the ‘right’ off-plan for them? For this, again, there isn’t a right answer, or step-by-step method. There are, however, some pointers and suggestions.
Firstly, it is important to research the developer themselves, and their track record of delivering similar properties. Particularly in today’s environment, with higher borrowing costs impacting the finances of developers as well as investors, it’s more vital than ever to work with someone that is reliable, and well financed. Almost all developers will have a website or brochure outlining their past portfolio, and a simple internet search can help to undertake any recent news, or forums that might uncover issues, concerns or positive reviews. All financial information around a company can also be found in the UK Companies House directory online, allowing you to view annual accounts and make an assessment as to their financial footing.
Second, ask searching questions of the agent which allows you to delve into the finer details. Agents, typically, will be driven to sell, and that can lead to a face-value, glossy description of a development. However, they will have the ingrained details on hand, or be able to gain feedback from the developer. A few substantive questions, for example, could be around what percentage of the properties have been sold locally, as opposed to overseas investors; or what insurance and protection is in place for investor’s deposits; or what progress has been made to date with construction and whether there is a detailed construction schedule in place, including a long-stop date. Linked to this, any agent should be able to put together a thorough breakdown of costs – both up-front and running – which will shed light on specifics such as service charges and ground rent (if there are any), and prospective buyers should request these
Further, people thinking about investing should talk to other third parties in order to form a more holistic verdict. This includes speaking to a lettings agent, who, with local knowledge and an unbiased view, can help to offer a nuanced opinion of the property and it’s potential – particularly from a rental perspective – relative to comparable properties. At a more basic level, if you have local family and friends, make sure to get their opinion, particularly of the specific area and how it is changing over time.
Ultimately, this is also where Tailor My Property come into play. With a network of third-party property providers spanning a spectrum of locations and property types, TMP aren’t affiliated to any developer, or off-plan development in particular. Rather, we aim to deliver a consultative approach, establishing a firm understanding of the client’s background and using that as the basis to form a brief outlining their criteria and objectives. Taking this forward, we then hand-pick property options from our network that we think make sense for the individual. Doing so, we really aim to take out any of the bias out of the process, instead helping the client to form a well-rounded, reasoned assessment of various properties, in order for them to make a choice they are comfortable with.
If you would like to speak to our team to get some more guidance around any types of property, including off-plan investment options, please don’t hesitate to contact us.