What are off-plan properties?
Off-plan properties: You may have heard wonderful things about it from successful investors – properties that promise good capital growth, tax relief, and good quality completion. Or you may have heard about the potential negative perceptions of these properties - how they can be quite expensive because they are marketed exclusively for international buyers who regard these overseas properties as a safe haven for investment as opposed to providing accommodation. While this is true, there are selected options we can offer for off-plan property investments that appeal to the local market.
Purchasing an off-plan property means buying a property that has not yet been built or is still under construction. This means that you are making a decision to buy based on building designs and plans as opposed to viewing a physical, complete property. While there are some things to watch out for when buying property off-plan there are more advantages to buying one. Here, we will discuss the good and what can often be perceived as ‘bad’ of off-plan investing.
Potential for strong property capital growth
When you buy a property off-plan you are usually paying a discounted price right from the beginning, allowing potential for attaining capital growth as the property value increases over the build period. In the early stages, developers are usually keen to sell off as many units as possible and will therefore be more open to discount to create these early sales. Buyers are also usually more willing to pay a higher price for properties that they can view in person - another reason that can explain the lower prices of off-plan properties. In urban regeneration areas, prices would also appreciate naturally towards completion because property prices of any kind tend to increase over time. Nearing completion of a project, the risks decreases and buyers (particularly local owner-occupiers) would start to join the market, increasing the demand.
A short-term strategy used by investors is to put the property up for sale immediately after completion to make a profit. A long-term strategy would be to achieve capital appreciation by obtaining rental income from tenanting the property over a longer period. This would be an addition to the increased value of the property over time.
Off-plan properties are new builds which means that everything in the unit is new. These properties are also more likely to be built to the latest environmental and safety requirements, in turn providing future-proofed real estate investments that are of the highest standards. In addition to that, new builds often come with white goods that are insured, and the buildings would also come with 10-year warranties to protect buyers.
An issue that existing homeowners face is cladding. Cladding makes it difficult or impossible to sell a property due to the difficulties in getting a mortgage. Therefore, when you purchase a new build, you will not be required to deal with the negative experience that cladding on existing properties has caused.
Most new builds have better energy performance rating, making them more energy efficient than most existing properties. Many tenants now put more importance on living in newer and greener properties, making new builds appealing for buy-to-let investments. Furthermore, these energy efficient buildings help save more money on monthly utilities. In the UK, there are plans to radically improve the energy performance of new homes, pushing all homes to be highly energy efficient properties with low carbon heating. The aim is to be zero carbon ready by 2025. These new builds are expected to produce 75-80% lower carbon emissions compared to current homes. New homes in 2021 will be expected to produce 31% lower carbon emissions.
Ability to select specific units
The freedom of selecting your preferred unit is another benefit of purchasing an off-plan property. Whether it’s a high floor, ocean facing unit or a low floor view of the greenery, having the ability to choose from a variety of options within a development gives you the ease of mind in selecting a property that is right for you. You would also be given the choice to have specific finishing, features, and the number of rooms that is most suited for you as well.
Cash flow management
When you purchase an off-plan property, you know exactly what to pay for and when. You are buying furniture with a set value and putting less into the ongoing property management. In comparison, an existing property may come with significantly more wear and tear and burden the owner with renovation costs that can escalate higher.
Things to be aware of
The downsides of off-plan properties have contributed to the negative perceptions people might have about them. While there are absolutely challenges to be aware of, these can be addressed and overcome.
Firstly, the projects may not be entirely what you expect after it is built. Certain materials used or workmanship may not result in what the developers marketed them to be and this can cause severe disappointment in investors. It is extremely pertinent that you choose trusted and reliable developers.
Risk of oversupply. There are new off-plan developments in numerous areas. However, some areas may see larger projected returns than others. In certain areas, there a lot more new-build developments, and if these units are largely similar, it can floor the market, putting downward pressure on prices and rental yields. Therefore, the way to address this is to choose locations carefully and consider smaller scale developments, where the risk of oversupply is significantly lower.
The final downside to an investment property is that there are a lot of properties that are being marketed to foreign buyers – usually larger scale flagship projects – that result in quick sell outs, driving prices extremely high too quickly before local buyers are able to purchase them. While this is the case with bigger projects, there are smaller-scale projects that provide similar returns and are more affordably priced. Large scale developments are not usually what local tenants or buyers covet. This may hinder occupancy rates, affecting the ability to sell on in the long term.
With that being said, off-plan properties are definitely good investments when purchased in the right areas and from the right developers which is why there has been a strong attraction to buying them. We are aware of these negative perceptions and explicitly say that we focus on small, unique properties that sell well on the local market and which are likely to appeal to tenants. Our extensive network of partners around the globe allows us to provide options that work best for you. Here at Tailor My Property, we are genuine in providing good consulting advice for your off-plan property goals. We hope that this article has been helpful in helping you understand off-plan properties a little better. Reach out to us for a conversation any