The idea of investing in something which doesnt physically exist might be your worst nightmare, but as with most things beauty is in the eye of the beholder, or in this case the investor.
Buying a property off-plan is a sound investment if youre willing to take the risk. Buyers usually get a discount on the price of the property, typically around 10-20 per cent, so as long as youre confident in the area and the developer then the profit is in the bag from the outset.
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The main thing to remember when buying off-plan is that youre buying with the expectation that the market will rise. You will need to put down an initial deposit for the property however you will only exchange on completion, whether this is in three months or three years.
If you are buying purely from an investment point of view then making sure you are on an assignable contract is paramount. This means you can sell up before the property is actually built, allowing you to make a profit but avoid being tied in if the building work should drag on.
Sort out your strategy
Firstly, you should sort through your investment strategy and work out the goals you plan to achieve. You need to work out whether you are looking to buy in the UK or offshore and you need to be serious about your aims are you looking purely for capital growth or a more continuous source of income? The risk values and therefore the budget are intrinsic to this decision, one which ultimately governs the type and size of property you are looking for.
Research, research, research!
Once the strategy has been established, the next step is to decide on your ideal location. The location of a property is essential to hook into the rental market and therefore gain overall capital appreciation as the area takes off. Whether you are buying to rent out or to sell on is the factor that everything hinges on as it will determine who your prospective tenant or buyer is.
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At this point, you also need to map out all the costs and work out how you plan to manage the cash flow. The payments may be staged or spread out comfortably and you need to know how this will factor into your grand plan.
Check the pricing
By now you should have a firm grip on your exit strategy and the next step is to work out if the price you are being quoted is genuinely market value. This can be done by way of a like-for-like comparison in square foot or square metres with a similar property already built.
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Pay attention to the exact location of the property you are comparing yours with. If you have invested in an apartment on the fourth floor then remember one in a similar block on the eighth floor will be at a higher premium as the further you go up, the more you pay. Areas which are currently seeing large-scale development such as Dubai have huge price variation so it is much more important here.
In addition, make sure that the price youre paying is the discounted one as most vendors will use a projected valuation, meaning the price that they give you comes at an unfavourable discount. Only sign for the property at a price you know is below market value, then there is instant equity and the price can only go up. More importantly though it gives you a safety buffer in case there is a severe market downturn.
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For developments offering a smaller upfront discount, there may be other incentives which have a bearing on the overall price, such as stamp duty or legal costs paid, or the inclusion of white goods, carpets and product upgrades.
There are only ever three occasions where you are guaranteed to get a discount;
- Whilst the development is still in blueprint stage and the foundations have barely been laid
- Once all properties are complete and the developer just wants to get rid of the standing stock
- At the end of the financial year when the developers push to meet their targets. It is worth keeping in mind that most Plc companies will report their annual returns to the city, with the outcome dictating the individual share prices, therefore shifting stock is a priority.
This differs when buying overseas as investors dont necessarily get a discount largely due to the deal being better to begin with.
Suss out the levels of demand
Even if youre buying the property purely for capital growth, it is important to have a good idea of the rental demand in the area. This is mainly due to the fact that even though youre not looking to rent it, your prospective buyer might be. This means that if the market isnt too favourable, the offer you get wont be either.
Fluctuating rental demand is more of an issue when buying an overseas off-plan property as it almost entirely depends on what else is happening in the area. Check whether there are golf courses or marinas being developed nearby, as well as whether the area is more suited to short holiday lets or longer ones possibly associated with new business in the area.
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Another key feature is the type of tenants you are looking to attract, and again a good bit of number crunching is needed. You need to work out whether the projected rental value covers all the necessary outgoings and compare it on a like-for-like basis with similar rental properties located nearby.
Investing for profit
For the more seasoned off-plan investor looking purely for capital appreciation there is the option to remove equity and therefore maximise the potential profit. This involves putting down a smaller initial deposit and then remortgaging to remove the equity. This means that under completion the investor is still paying back their mortgage, but all the capital is back in their pocket, ready to invest elsewhere.
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The final hurdle
Once you have your completion date, assuming you havent sold the property on yet, you can either get an agent lined up and start advertising for tenants or you can scout for a buyer.
You need to dress the property well, even when renting it as an unfurnished unit the key is to get the prospective buyer or tenant picturing themselves in their new home. You need to factor these furnishings in it could take 4-6 weeks for your sofa to be delivered and plan around them.
This forward planning will lessen the void period and mean that you can maximise the time you have between confirming the completion date and the actual completion of the development. It will also give you time to work out the legalities associated with renting; insuring the property, sorting out the House of Multiple Occupancy documentation and other associated paperwork.
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