Note: This post was originally published in 2020, but has been updated since. The last update was in May 2022.
Investing in off-plan property is a strategy that is often a point of consideration for investors during a ‘normal’ investment environment and even more so during the COVID-19 era. So today, we wanted to explain what off-plan property investment is, if you should rule it out and if not, how it can be advantageous to those exploring investing in the UK property market throughout 2022 and beyond.
Firstly, buying off-plan involves purchasing a property during the construction process. This can be a couple of months from completion or up to 2 years in some cases. The key benefits include purchasing at a discounted price, as developers need to incentivise investors to purchase during the construction period and this mostly comes from a reduced rate. Furthermore, it gives investors the chance to buy direct from a developer at the base pricing, rather than from another investor on the secondary market with a mark-up on the pricing.
Our purpose in this article is not to go through all the advantages but more so to address how it can be beneficial in the current market. Instead, if you’d like to learn more about the pros and cons of off-plan investment, then check out our post: The Benefits Of Buying Off-Plan Property (And Three Risks)
Is Off-Plan Investment For Me?
Before we dive into the potential further benefits of an off-plan purchase, it’s clear that this type of purchase is not for everyone and the points below will help you decide if it might work for you.
Typically, when purchasing an off-plan property with a mortgage you can obtain a formal offer from a financial provider approximately 3 months out from completion, prior to this you will obtain an offer in principle based on your circumstances and the property. If you do obtain an offer it will likely be for a maximum of 6 months. With this in mind, you do not want to commit to a purchase without being sure you can get a mortgage closer to completion, if you typically have a wide range of lenders open to you this shouldn’t be an issue but if you struggle to get a mortgage on a property on the secondary market it’s best to ensure you’ve discussed at length with an experienced mortgage broker/advisor.
Specific Completion Date
If you’re heavily reliant on the income starting to accrue from the projected completion date and you will be in financial difficulty if there are any delays, then put directly, you shouldn’t be investing in any property let alone off-plan projects.
Whilst an investment company can relay projected completion timeframes and updates from developers, in some cases progression is simply beyond control, COVID-19 or extreme weather being prime examples. So just consider that when buying off-plan there is always a slim chance of a delay, all be it mitigated by going with an experienced developer and construction company. We typically add a few months onto the projected completion date to be on the safe side.
You Are A Worrier!
This is a big factor that some investment firms overlook, you may be financially and practically well suited to off-plan property investment but if your general thought process includes worrying and affects your day to day quality of life, then, of course, you shouldn’t invest in off-plan property to save 10-15%. There is no point in investing and then worrying for the next 6, 9 or 12 months. So in general, if you are very risk-averse then we suggest sticking to an investment without construction risk, no matter how good it looks on paper.
Why Off-Plan Now?
Ok, so you’ve decided that you may be open to considering an off-plan project, the next question is why would you, other than the pricing, buy off-plan?
We’ve outlined a few of the main reasons below:
Potential To Flip?
When purchasing off-plan, the right property can present the opportunity to flip. What do we mean by this? When you buy a property off-plan, you will most likely pay a discounted price compared to what it would be worth if the property were built and complete. So, let’s say you secure a property now for £200,000 and in 24 months’ time, before completion, it is re-valued at £250,000. If you then sell it, you will have made a £50,000 gross profit from just putting down your initial deposit e.g. less any costs. This is an extreme example and that would be a phenomenal return, but it does demonstrate how you can profit from a low cash outlay and limited risk exposure of the deposit but still benefit from the capital growth on the entire property value.
While this is potentially a lucrative strategy, we do not advise this to be your only exit strategy as it is market dependent and comes with risk. You should always factor in the option that you will have to hold the property and rent it out so make sure those numbers work for you, and of course, choosing a genuinely discounted project is crucial, so be sure to do your research.
Demand for off-plan property is soaring after a blip through the pandemic. A few years back, in 2017, off-plan property accounted for 47% of all new homes sold. It’s dropped a little since then, but the National Association of Property Buyers (NAPB) estimates that off-plan sales will reach a record-high in 2022.
Speaking from our experience, this certainly seems to be the case. It’s not uncommon for entire developments to be entirely sold out well before construction is complete. This is especially true on popular projects in high-potential areas (anything in Liverpool and Manchester is moving quickly!), which are usually city-centre apartment blocks – with the investor demand fed, in turn, by the exceptional demand from tenants for high-quality rental properties.
Beat The Bank
In May 2022, the UK interest rate was raised to a 13-year all-time high of 1% (in 2021, it was as low as 0.1%). Given the rate of inflation and several geopolitical events impacting the economy, it’s likely that it could go higher. Nonetheless, with some (but not all) off-plan opportunities, developers will actually pay interest on your deposits. So, during the period that your investment is being built, your capital is earning interest, which is rolled up and deducted from the purchase price.
Usually, the interest rate offered by developers is better than that offered by the banks (despite the recent increase), meaning you could ‘beat the bank’ by putting your money into an off-plan project instead.
So hopefully, the above has given you a bit of an insight into whether off-plan property investment is for you, or at least a starting point. There are countless articles to be found online which will go into further detail and we suggest you have a good read.
During the pandemic, construction from some of the substantial public developers stopped in the UK, with a lot of sites ticking over at a slower rate, which had an impact on completion dates for many projects. However, things are returning to normal now that restrictions have eased and supply lines are being re-established. This may also be a good time to lean on developers to negotiate an incentive as (with all businesses) most will be keen to keep on moving with sales, it is not guaranteed they will say yes, but it’s worth asking the question.
If you want to discuss it with an experienced Investment Consultant then feel free to reach out to us at +44(0)203 627 3987 or via [email protected] and we can run through your plans, work out if it’s best suited for you and look at live projects across key UK cities.
Or, to learn more about off-plan property investment, find out about the 10 questions you should always ask before buying off-plan.