OFF PLAN INVESTMENT GUIDE
Buying a home before a single brick has been laid may sound like a risky business but in recent years the off-plan route has become hugely popular with investors keen to get ahead of the game.
Often these buildings are little more than a muddy hole in the ground. There's a hoarding around the site, an agent's number to call, maybe a marketing suite, and lots of nice CGI images and plans to look at.
It's not for the faint-hearted, but that doesn't seem to deter people. Quite the opposite. "Demand for new developments in London has been very high," says Sebastian Warner, Investment Manager for Knight Frank.
"This summer we've had people queuing round the block for new developments in Battersea and Docklands. The market has been very buoyant."
Just so. But how does the system work? What are the benefits and risks? And what issues should you consider before you commit to a property with a completion date that could be two years down the line? Below is a brief guide.
1. Why Do It?
The Pros
- You buy at current prices, or at a discount, and when the building is completed in a year or two hopefully capital appreciation has made it worth much more - so in a strong market you can make a 10-20 per cent profit off an initial ten per cent deposit.
- You buy new-build so no maintenance. New-build property also comes with warranties.
The Cons
- Prices fall as well as rise.
- If rates rise or rents fall during the build you will pay the price -with long lead-ins this can be a real issue.
- Even if prices do rise over the build period, there's no guarantee that it will be easy to sell on the property at completion ('flipping'). If there are lots of investors in the same development it can be difficult.
- The market changes and it proves more difficult to let than you imagined.
Whatever your objectives, the whole business is something of a gamble. So careful research is essential to help minimise the risks - and maximise the gains.
But if it's a gamble, it's one many feel is worth taking. Berkeley Homes say approximately 80 per cent of their developments are sold off-plan, half to investors and the other half to owner-occupiers.
2. When Does It Begin? Access To Developments
Officially, off-plan marketing begins when the developer releases the development to estate agents. There's a launch date, maybe a big event to raise the curtain on the scheme, and a certain number of off-plan units up for grabs.
There are, however, also pre-launch sales. Developers use these to test the water and they can be a good way to get a discount on the property or buy with a lower deposit.
The bad news is that most pre-launch business is offered to large investors buying multiple units - pension funds, large investment syndicates, and the like.
But not always. Agents do sometimes get pre-launch property and this they usually sell to established and serious investors on their books.
So it makes sense to cultivate relationships with agents who are regularly used by developers. Investment companies can also have access to discounted pre-launch properties - but you will have to pay them.
As a general rule of thumb it can be a real advantage with off-plan to get in early. The primer plots and best discounts can be available at this point - hence the queues.
If the launch goes well, later releases will probably be more expensive. Bear in mind, though, that if you buy and the launch doesn't go well, prices may be reduced later on, which will put you on the back foot from the get go.
Remember too, whether you're in there at pre-launch or launch, you can definitely negotiate on the price, on the deposit, and on additional features such as parking spaces.
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3. Do The Numbers Stack Up?
If you're buying as an investor - and most off-plan sales are to investors - the first thing you'll need to consider is whether the numbers stack up. Is the price right, and what is the rental potential?
To answer these questions, you'll need to research the market carefully. Check the sale prices in other new-build developments in the area. And check rental prices too - developers give their own estimates, but these are usually on the optimistic side.
Ultimately, of course, the loan you get will depend on what the mortgage company thinks the property is worth, so instruct a surveyor on your lender's panel.
The surveyor will assess the value and the rental potential - this can sometimes be different from the developer's so it's a vital stage to go through before you exchange contracts.
4. Should You Buy?
Some questions you'll need to answer before you buy:
- Price: Is the property properly priced? Go on current prices in the market and if it looks over the odds, think again.
- Yield: What rental yield will it deliver? Don't rely on the developer's estimates.
- Area: Is the area on the rise? - ie: new infrastructure or regeneration plans, that will boost values?
- Supply: What's the supply situation like? - if there are lots of new-build properties going up the market may be saturated come completion time.
- Investors: How many investors are buying in the development? - too many will mean more competition for tenants (interestingly, The Cube development in Birmingham is split into two halves - investors and owner-occupiers).
- Rental Demand: What's the rental demand like? Is this an area your target tenants will want to live in? Is the infrastructure in place?
- The Developer: Is the developer well-established? What's their other work like? Are they NHBC registered (this will mean they're insured).
5. The Property
Buying off-plan demands a degree of imagination - you need to visualize the layout of the development, of the block, and of the property.
It also demands a healthy degree of skepticism because developers will put on a big PR show with models, mock-ups, CGI images, glossy brochures, and flashy launch parties.
Drink the wine and nibble the canapés, by all means, but ignore the hype and keep a cool head. With the property, think about:
- Layout: The layout of the development and where the property will be - is it in a secluded part or a busy section? Visit the site if you can.
- Aspect: Where is the property in the building - does it overlook train lines or a thundering road? Does it have a lovely view? Does it get good natural light?
- Services charges: Service charges can eat into yields so it's important to know what they will be and what you get for them.
- Specifications: Are they what you want and will they be appealing to your target tenants?
- Extras: Bargain for all your worth to get the best deal - whether that means a parking space thrown in or stamp duty paid.
- Rental Guarantees: There's no such thing as a free lunch - the cost of rental guarantees is often included in the asking price.
6. The Voice Of Experience
Annie Hulley, property investor and author of How to Be a Property Millionaire and, more recently, Spending The Kids' Inheritance, has bought numerous properties off-plan. How does she go about her business?
"I always haggle for as much as I can get and I do try to buy the best apartment I can within my budget. I like to find something with a unique selling point - a good aspect or a nice view, or parking.
"These details make it easier to let and also make it easier to sell on - they don't necessarily mean better yields, but the better the proposition the fewer the void periods, which can effect yields.
"When I started out I didn't look as closely at supply, but now I do because there has been a lot of new-build in city centres and in some places over-supply is an issue.
"I've also learned that with big developments, ongoing work can be an issue. If you buy in the first phase, which is often where there are good deals, tenants will move into a site still under construction and that can initially have an impact on the rent you can charge.
"It balances out in the end - I take a fairly long view - but it's worth keeping in mind. Generally speaking, buying off-plan is not as easy as it used to be. The days of big profits from flipping are gone. But it's still a great way to buy property and if you do your research properly it can deliver excellent returns."
7. The Process
- Find a Property: You find a suitable development and think it looks interesting.
- Talk To A Lender: Get a decision in principle from a mortgage lender.
- Reserve a Plot: View the plans and pay a non-refundable £1,000 reservation fee.
- Surveyor Instructed: Buy-to-let mortgages are based on the surveyors' valuations, so instruct a surveyor recommended by your lender. The surveyor will also consider rental values.
- Mortgage: Have a mortgage offer in place before you exchange contracts. Don't complete without it or you could discover the loan your lender will offer won't cover the cost of the property.
- Exchange & Deposit: You exchange legal contracts within 3-4 weeks; on exchange you must pay a 5-10 per cent (minus reservation fee). If you fail to complete, you lose the deposit.
- Completion Dates: There are usually two, a short stop and long stop date. The development can't be completed before the first or after the last (usually a generous time frame). Remember - there is no definite completion date.
- Snagging: You get a couple of weeks' warning before the final completion date. This gives you time to check the property - you can employ a professional snagging company or do it yourself.
- Completion: Your solicitor transfers funds from lender - stamp duty is also due at this point.
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