Off-Plan Property Investment – The Complete Guide
Off-plan property is a hugely popular type of investment in the UK. With off-market properties, investors can often secure a good deal on the price and the returns in terms of monthly rental income and capital gains can be lucrative if the property development is in the right area.
Off-plan developments may not be for everyone, so in this article, we take a look at whether pursuing this type of property is a good investment and some of the key benefits for property investors and the things you should consider before buying off the plan.
What Does it Mean When a Property is Off-Plan?
An off-plan property is one that is still in the construction stage. Usually, an investor will buy a property that is not yet completed from a developer. While off-plan property investment does come with some risks, if you invest in the right area, where property prices are on the rise and there’s strong demand, plenty of rewards come with this type of investment. Overall in the UK, we are seeing a rising demand for off-plan properties, and government initiatives such as help-to-buy schemes are only serving to boost their popularity.
Is Buying Off the Plan Safe?
As with any property investment, buying off-plan comes with some risks, and the situation is quite different from purchasing a normal property.
First of all, an off-plan property is one that has not yet been completed so you’ll have to wait for the completion date in order to physically see it.
Secondly, there is a different process to financing the property, which normally takes place in four stages (although this can differ depending on the developer):
- the investor needs to put down a reservation fee,
- pay a percentage of the property price upon the exchange of contracts,
- another percentage of the property price during a set date in the construction process
- and pay the remaining balance upon completion.
It’s important to understand the financing options and payment plans that come with buying property off-plan in order to have the appropriate finances available for each stage.
Investors that seek out a mortgage to finance their property purchase should be aware that with most lenders a mortgage application stays valid for 6 months. You want to avoid being in a position of having paid the reservation fee on a property but be unable to secure a mortgage for the rest of the payments.
Similarly, if the property is not built within the expected time frame, you may face the hassle of having to reapply for a mortgage. Many banks now offer 12 months on a new-build mortgage application and in many cases, you can apply for a 6-month extension during the offer period.
With any property purchase, it’s important to undertake the appropriate due diligence and off-market properties are no exception.
Here’s what you should do:
- research the track record of the developer and the outcome of their previous developments to ensure that the result matches up to what was promised – a good way to do this is to look at reviews and buyer satisfaction in terms of what they think of the finished product.
- As well as look into a developer’s track record you should ensure that finance has been secured for the development. The last thing you want to happen is that the development fails to be completed due to inexperienced developers or a lack of financing.
How do I Choose an Off-Plan Home?
When investing in a property, knowledge is key and you’ll want to avoid your investment falling in value before it’s completed by making sure it’s located in a high-performing area.
When it comes to off-plan property investment, certain areas of the UK offer better prices and higher rental returns than others.
Northern cities such as Leeds, Liverpool, Manchester, and Sheffield each offer some enticing new-builds. Each of these cities is undergoing significant regeneration and receiving ongoing investment alongside a growing population, often resulting in a housing shortfall. New builds in these cities are particularly popular and can become a strong real estate investment in terms of generating good returns for buyers.
Investors should note that when it comes to off-plan properties different opportunities are available depending whether you want to invest in student off-plan developments or residential ones.
In many university cities, there is high demand for quality student accommodation, making this type of off-plan investment property quite popular.
Investing in an off-plan student property is often more affordable than a residential home and rental income can be significantly higher if the property has sought-after features and is high in quality. If the property is in the right area – close to campuses while still located in proximity to sought-after amenities, there is usually strong demand in top student cities like Manchester or Leeds.
Residential off-plan properties are usually found in city centres and the target tenant market can be young professionals, families, or other individuals. Younger demographics in particular seek out off-plan developments due to their appealing location and modern design. Capital growth with residential off-market properties tends to be high due to their appealing location in cities that have strong house price growth. Similarly, if you can buy off-plan for a lower property price, rental yields tend to be quite strong.
The top advice when buying off-plan property is to choose something where the demand is set to increase. The North West region has the highest predicted property price growth in the UK, and by 2025, house prices are expected to increase by 28% – making off-plan developments in these areas particularly lucrative.
What are the Benefits of Buying Off-Plan?
Investing in off-plan property is particularly popular nowadays and it’s not hard to see why. Here are some of the reasons that make buying off the plan a no-brainer.
- Below-Market Rates
Off-plan developments can often be had for below-market rates. Many property developers will offer the property at a discounted price to attract buyers. Particularly at the start of a development.
House builders will usually be willing to negotiate on the asking price because they need to sell the units in order to fund the next stage of the development. Investors that have the ability to pay upfront in cash can also get large discounts, as well as those in a position to buy multiple units.
In some cases, it’s possible to find an off-plan property at 20% – 50% below market value. If the developer is unwilling to be flexible on the asking price, often they will be able to offer other incentives such as covering the cost of stamp duty.
- Strong Capital Growth
Capital growth tends to be higher with off-market properties. If you secure a property for below market price and it’s located in an area with increasing housing prices, you stand to make significant capital gains.
Similarly, as you may have to wait several years until the development is completed, you could see the property value increase before it’s even finished. Rising property value before completion is a good sign of future capital growth, too.
- Popular With Renters
For those seeking out a buy-to-let investment, purchasing an off-plan property is often the way to go because they tend to be hugely popular with renters.
Many tenants are willing to pay more for a modern, contemporary home, particularly young professionals and students. Similarly, new builds tend to be more eco-friendly with higher energy-efficiency ratings and lower energy bills making them more appealing.
Since the COVID pandemic, we have seen a shift in what renters are looking for from their property. Many seek some type of outdoor space like balconies or patios as well as spacious en-suites, kitchens, and even a spare room that can be used as an office.
When you buy off-plan you’re purchasing something that hasn’t been built, but this also gives you the opportunity to purchase the best units. With an off-plan investment property, investors can cherry-pick the units with the most appealing features for renters, boosting the likelihood they can find tenants.
Because off-market properties are new, modern buildings, there tends to be less maintenance, making things more straightforward for landlords – you’re unlikely to need the same level of maintenance as with an older property.
- Payment Plans
Off-plan property tends to come with staged payment plans. This can be beneficial for some investors because they don’t need to pay in full before the property is complete. Usually, a small deposit is required in order to reserve the property and a percentage of the property price at a certain construction stage.
While off-market properties might not be suitable for every investor – mainly due to not being able to see the property before purchase and the possibility of having to wait for its completion – for some they can make an appealing property investment. Often it’s possible to secure an off-build property for below market rate, setting you up to achieve strong capital gains and monthly rental yields if you’re purchasing for buy-to-let. Modern properties tend to be highly popular with renters and whether you purchase an off-plan student property or off-plan residential property, if you purchase in the right area, off-plan properties can be very lucrative indeed. To find out more about off-plan properties, get in touch with our experts today.