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 COVID-19. 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 2020 and beyond.
Firstly, buying off-plan involves purchasing a property during the construction process, this can be from a couple of months to completion or up to 2 years in some cases. The key benefits include purchasing at a discounted price, developers need to incentivise investors to purchase during the construction period and this mostly comes from a reduced rate.
On top of this 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. If you want to discuss the pros and cons and if it could potentially suit your investment objectives, then do reach out to the team.
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, in our cases 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 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 that the pricing, we’ve outlined a few additional points which are evident more so in the current market conditions.
If you secure an off-plan property now, this could be a real benefit, especially if the completion is for the latter part of next year or even 2022 because it gives a chance for the market to settle and correct itself, maybe even have a surge in house price growth, meaning you sit back and miss the storm while still securing an attractive asset at a discounted rate. The property market is currently at a stand-still due to COVID-19, if the market does take a slight dip then we do not foresee this being for too long. Knight Frank has predicted a -3% decline on average across the UK for 2020 but then a +5% increase in 2021 which follows our prediction of a short-lived blip.
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 was 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.
This could be a great opportunity if we have a positive surge in property prices following the Coronavirus blip. Now 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.
Miss the Voids and Capitalise on Tenant Demand
Due to delayed completion, you miss the current period of uncertainty and issues such as tenants not being able to pay rent (the Government have currently allowed 3 months with no eviction proceedings) or a tenant moving out and not being able to re-let the property due to no viewings taking place. When the development completes in 12-24 months’ time, the uncertainty will have gone and the rental market should be an even more buoyant one due to more people being forced to rent. More demand can lead to rental price increases which will be more prominent in city-centre locations.
Beat the Bank
The UK interest rate is currently at an all-time low of 0.1% and we do not anticipate that going upwards much anytime soon. This means, leaving money in the bank is not wise and if you take inflation into account, you could be losing money with it sitting in the bank earning minimal interest. Whereas, with some of our off-plan opportunities, the developers are actually paying interest on your deposits, for example, a Liverpool development is paying 3%. 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.
So hopefully, the above has given you a bit of an insight as to if 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 into it.
Construction from some of the substantial public developers has stopped in the UK currently but a lot of sites are ticking over at a slower rate, so just bear this in mind for completion dates but we expect things to return to normal (within reason) shortly. 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 worth asking the question.
If you want to discuss it with an experienced Investment Consultant then feel free to reach out to us on +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.