Investing in Off Plan Property

Thilrmere Deacon regularly recommends their clients secure off plan property to enable the greatest potential for capital growth.

Not all off plan opportunities are equal and the merits behind each will be based on location, the development itself and the developer. Given that the developer and construction company building the property are what stands between the investor and realising the potential of their tangible asset.

Investing in off-plan property entails purchasing a property while it is still in the final planning or construction stages – an investor will commit to purchasing a property based on the plans.

They might, in some instances be able to visit the construction site and see a show flat but certainly for those who secure units at the earliest stages, off plan means a purchase based on the plans, architectural drawings and computer generated imagery.

This type of investment is often popular with investors as it offers numerous benefits, such as early investor discounted prices and choice pickings of the available units.

Off-plan property investment as a broad term includes any type of property that is not yet built, whether it is an entirely new site being developed or an entire refurbished building, in all cases an off plan property is not yet ready for tenants to move in, though it might be imminently.

However, investing in off-plan property is not without risk entirely; it’s vital for potential investors to conduct thorough research, carefully consider the location of the development and check a developer’s track record.

Working together with professional advisors can ensure an investor is making informed decisions and mitigating any possible risks. Here’s everything you need to know about off plan property:

What is the meaning of Off Plan Property?

Off plan property refers to a property that is purchased before the completion of building works.

Buying a property at these early stages is a popular strategy for investors seeking to capitalise on future growth in the housing market.

Investors buy off-plan properties based on architectural plans, computer-generated imagery and specifications provided by the developer. This allows buyers to secure a new home with a small deposit, sometimes benefiting from payment plans that developers offer.

When investing in off-plan property, it is crucial to work with reputable developers and conduct thorough research to ensure the construction progresses according to schedule and meets the anticipated demand for units.

Is it good to buy property off plan?

Investing in off plan property can be a strategic choice for investors seeking capital growth and portfolio diversification.

Benefits of buying off-plan include discounted prices, flexible payment plans and access to brand new properties. As an investment option, off-plan property investment enables property investors to secure units at below-market value, which can contribute to a healthy investment portfolio.

However, it is essential for investors to carefully consider their investment strategy and weigh the pros and cons of buying off-plan. Some risks may include potential layout changes or issues with securing a mortgage in a timely manner. Being knowledgeable about risks and rewards, as well as taking advantage of professional advice, can lead to successful buy-to-let investments in off-plan properties.

What are the risks of Off Plan Property?

Investing in offplan property can be a lucrative venture, but it does come with several risks. One significant risk is the possibility that the project may not be completed as planned, due to factors such as financial problems, legal issues, or changes to the development location.

Another risk in off-plan investment is the uncertainty in house prices. If the market takes a downturn, the value of the property may decrease, affecting capital gains. Additionally, obtaining a mortgage for an off-plan property can be more challenging, as some lenders may be hesitant to approve loans for unfinished properties. This could lead to issues with staged payments and meeting deposit requirements.

Off-plan properties might also face delays in attracting tenants, as the property’s final appearance and specifications may not be clear until completion. This uncertainty can affect rental income expectations. Inflation and pandemic-related factors may also play a role, potentially impacting construction costs and property values.

To mitigate these risks, engage with knowledgeable agents and thoroughly research all aspects of the project, including the developer’s track record and financial stability. Furthermore, consider obtaining insurance to protect your investment against unforeseen circumstances.

Off plan property

Off Plan Property | Key Information

As we’ve made clear, investing in a property before it’s been built, known as off-plan, has become more attractive to investors throughout the UK and overseas. It’s seen as a way to purchase a property at a discounted price ahead of a price rise on completion, essentially giving investors instant equity in the property once completed.

There are many pros and cons for investing in off-plan property, but as the government is keen to get close to their target of 300,000 new homes each year (in order to meet the current, and ever-increasing demand), there is no doubt a great opportunity for investors to cash in on this undersupplied market.

It’s not quite the same as purchasing a house, or completed property, but the process is not an overly complex one. Investors generally are required to pay a deposit in order to exchange contracts (typically 20-30%), with the balance of the funds due on completion. Occasionally developers will be required by their finance lender to request an additional payment from investors throughout the development.

The other tools that make it much easier for investors and buyers to make decisions to invest in off-plan property are computer-generated images (CGI’s), many of which now can be difficult to tell if they are CGI’s and not the real thing.

Off plan property equals higher returns

One of the big advantages is that you are securing the property at today’s market value (possibly less), giving time for a significant increase in the value by the time the development is completed. It is not uncommon for some investors to have made up to 100% growth on the value of their unit between the exchange of contracts and completion.

And it’s certainly not uncommon for investors to double their initial deposit during the build period. For example, Investor A commits to buy a property 3 years off plan in Manchester for £200,000.

He puts down a 20% deposit (£40,000) to secure the property.

Growth in the city is approximately 7% per year. Over 3 years is 21%, therefore the value of the unit is now approximately £242,000. He could sell the property, take out his initial £40,000 and a further £42,000 profit.

Of course, there are no guarantees, so it is important to be investing in areas with strong demand, and consistent growth potential, and also invest with developers who have financing in place and are not using the investor’s funds to complete the build.

What are the best places to buy off plan property?

There is a lot of media hype about the North West at the minute, and this is not to be ignored. The predictions by Savills recently suggest that house prices in the north-west will significantly outperform London over the next five years, putting Liverpool and Manchester at the top of the ‘hot spot’ list year after year.

The reason for this is the level of investment in both cities generating huge numbers of jobs for the local area, putting further pressure on the demand for high quality accommodation, in addition to rapidly growing universities that are already under supplied with regards to the accommodation for their students.

Mortgages for off plan properties

Many investors think it is extremely complex when getting a mortgage on an off-plan property. This is a myth! It is very possible to take out a mortgage on an off-plan property, although the criteria is different from lender to lender.

A bit of advice…don’t submit a full application until the development is within 3-6 months of completion. Time and time again we see mortgage brokers advising investors to submit an application (as an excuse to charge their fee up front), then when it comes to the survey, there is nothing for the surveyor to view as the property is not ready yet.

What we always advise our clients to do is secure a decision in principle (DIP) from the lender – this is essentially the lender doing a quick review of your situation and giving a yes or a no to you. Make sure you declare all of the information they request as you could run the risk of a declined application if you aren’t fully honest about that missed/late loan payment two years ago, or that high credit card balance.

If difficult market conditions mean that the mortgage valuation survey values the property at lower than the price you originally agreed, a second opinion can be sought – although for those smart investors choosing developments in the ‘hot spot’ locations, this risk should be very small, plus the developer and selling agent will/should have sought advice from a local surveyor when doing their initial assessment of the development, prior to launching the sales of the units.
Some investors choose to ‘flip’ their properties, which involves buying at off-plan price, then reselling before completion once the value has risen – this is a slightly risky investing strategy – some clients make a lot of money from it, some clients don’t. You will also need to ensure the contract you have is fully assignable if this is your investing strategy.

Why do developers sell off plan?

Property developers often sell off-plan to meet the high demand for housing, particularly in the UK’s regional cities such as Manchester, Birmingham, and Leeds. Selling off-plan allows developers to secure funds for the completion of their projects, ensuring a smoother construction process.

As a buyer, you’ll typically pay a reservation fee and then work with a solicitor to complete the necessary research and legal work. This reservation fee often helps property developers in the financial planning of their projects.

Developers in the North West, where demand for housing is particularly high, benefit greatly from off-plan sales. These sales offer investors the opportunity to secure properties in high demand areas, while also providing an opportunity to customise the home’s design to their preferences, making it a popular choice for both UK and foreign investors.

Tips for investing in off plan

Remember, when buying off-plan, always conduct full research into the area, and local market, for both rental demand and resale demand. Although it can seem like a daunting process, if you conduct thorough due diligence, the rewards can far outweigh the risks, and by working with an experienced sales agency you should have a very smooth process.

One final thing to remember, property prices over the last 100 years have doubled on average every 7-10 years (this is through 2 world wars and multiple recessions). The reason for this is simple…the rate at which new properties are built is no way near as high as the rate at which more humans are being added to the earth! Demand V Supply. When the demand is high and the supply is low, and you hold onto the property…you will always win. And even if prices don’t rise as much as that…you’re still renting it out and generating an income!

Talk to Thirlmere Deacon about investing in off plan property

In a market where property prices are on the rise and more homes are needed, investing in off-plan properties can be a rewarding venture. Investors have the opportunity to secure a property at a competitive price before construction has even begun, allowing them to capitalise on potential appreciation in value while minimising the risks associated with traditional property investments.

We are looking forward to hearing from you regarding your next investment. If this is your first time landing on Thirlmere Deacon Property Investments I encourage you to visit our homepage to read more about us and to see what we have on offer.

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