While any investment involves a degree of risk, in return for a degree of potential profit, the property market has been the most popular market over the last few years. As prices rises and interest continues to grow,  many of the “good deals” never reach the light of day, being snapped up by agents prior to official release.  However, there are some lesser know areas of property investment which offer potentially larger profits, although they also expose the investor to potentially greater “unknowns”, i.e. risk.  One such type of investment is off-plan property purchases.

 

What is an off-plan property investment?

As the name suggests, an off-plan investment is the purchase of a property which has not yet been built with the only aspect to consider being the “plans”, i.e. you are buying “off the plan”. 

As the more traditional markets have continued to expand, property investors have been more prepared to move up the risk scale, in return for a potential larger gain.  Few areas of property offer such elements more than off-plan investment.  However, there are a number of factors to consider :-

Plans

Do not forget that the developer who is trying to sell you an off-plan investment will make the developments sound as attractive as possible,  trying to tempt you to invest in the project prior to completion.  The problems are that some of the best plans never see the light of day, with changes and amendments along the way - although you should ensure that there are limits to any changes written into the agreement.

Cost

To make an off-plan investment even remotely attractive, you will need to see a substantial discount on the “normal” selling price, i.e. the estimated value of the property when finished.  Unless there is sufficient reward for the extra risk, walk away from the project and look elsewhere, or play hard ball and negotiate a better deal for yourself - the developers will always factor in some kind of discount on their initial offer, allowing some room for manoeuvre.

The Area

The area of any property has a major effect on the value of a property, you can have the biggest house in he city but if you are in the wrong area it is just not a viable investment.  Up and coming areas are very attractive to the more risk taking investors, but buying off-plan in itself is a big risk, so why make matters worse?

Stick to areas you know, or have researched, areas which offer the potential for quality developments and an active market for those looking to buy and sell.  An active secondary market can often be very important for those investors wishing to take a short term gain where possible.

Rent

If you are looking at purchasing a property to rent of lease then it is vital that the investment yield and value of the property are in synch.  Prior to the recent rise in property prices, a ball part figure of 10% was used as a guide to rental yields.  As prices have risen quicker than rental income, this ratio has reduced somewhat and it is vital that you check comparable rates on other properties in the area.

The developer

As you are actually purchasing a property before it has been built, you are effectively taking a risk that the development will be completed.  We have all seen tales whereby properties have been pre-sold only for the developer to go under, leaving investors with unfinished properties and extra costs to rectify the situation.

Do you homework on the developer, if it is a main stream developer the chances are they will be around in a years time.  However, if it is a local one man company then do your homework, and at the very least ensure that the cost of the transaction reflects any additional risk you may be exposing yourself to.

The market

After looking at an off-plan property investment, you may well come away with the idea that the property is perfect for the area, with plenty of demand.  Unfortunately, this is not always the case because it may well be that there are other properties being developed in the areas - will prices hold up, will the market get saturated and what is trend of the general property market?

These are all vital areas which you will need to consider - applying a degree of guesswork to some of them!

The process of buying an off-plan property

While the process itself is fairly simple, the “off-plan” community can often be a difficult one to break into, with many developers using them as a way to reward their regular estate agents.  The majority of these investments are done via invitation only launch parties, where potential investors will be offered a more detailed look at the development, maybe a 3d computer program, showing the project in all of its “glory”.  Be aware of such high tech presentations, take a step back and try to imagine how the site would look yourself, stripping away the glitz and glamour.

It is at these parties that investors will be given the opportunity to negotiate lower deposits, cheaper prices or maybe an add-on feature to the property you are considering.  These parties are often used to gauge investor interest, and can give an indication as to how much the finished properties may be sold for.

Why do developers sell off-plan?

There are a number of reasons as to why off-plan properties are marketed in such a way.  These include :-

• Cash flow.  The sooner a developer can sell a property, the quicker they can use the cash to reduce possible loans / overdrafts, etc.  By having “cash in hand” it can also allow the developer to negotiate cash discounts themselves from suppliers, rather than 60 or 90 day account plans.
• Gauging the market.  While a developer will obviously have done their homework before beginning a property development, an off-plan sales event can give a very useful insight into current demand in the area.  This can often in result in price changes prior to the official launch of the finished project - either up or down.
• The feel good factor.  Anybody in the development business will say that the hardest property to sell is the first one. Once people know that there is interest in the development, this can often increase demand with people “rushing” to buy before they all go. This is where clever marketing comes in, and the ability to often create demand which may not have been their naturally.

In general their are added risks to off-plan property investment , but there are also potentially greater rewards.  As with any investment, background checks and research are vital if you are to give yourself the maximum chance of success.  Also, do not be afraid to negotiate, they will expect it!