By Jerald Solis, Director, Experience Invest
Over the last few months, the government’s failure to resolve Brexit has hampered growth across all areas of the UK economy. However, the uncertainty has probably had its greatest impact in the housing markets where homeowners and investors alike have adopted a “wait-and-see” approach.
With Theresa May’s exit date now set for June 7, it’s not known whether market activity will increase in the coming months. However, it’s important to acknowledge that Brexit uncertainty has not undermined the number of property investment opportunities currently on offer. This is particularly true when it comes to off-plan property investment.
Off-plan property investment has become an increasingly attractive option for a number of reasons. Most significant is how the culture of lending has changed significantly since the 2008 financial crisis. In essence, many traditional lenders have become more risk averse in order to mitigate against defaults and this has created a shortfall in investment funding for construction projects and property developments. As such, this has forced construction firms to seek alternative forms of investment, often from foreign investors and financial institutions. But what’s in it for potential investors? And what can investors do to get the most out of off-plan opportunities?
Why go off-plan?
The primary reason why off-plan investment represents an attractive opportunity for investors is that it allows them to buy a property at a discounted price. Indeed, investors can get as much as 15% off the completed asset’s value. In addition, the investor benefits from any capital growth of the asset during the construction process. This means that if the the value of the property increases during the construction process, the asset could be worth exponentially more than it was purchased for on eventual completion.
However, what really sets off-plan apart from say, a standard buy-to-let investment is that they provide the investor with annual returns throughout the construction process. Essentially, by investing off-plan investors are financing a property development and are therefore reliant on the construction company to make interest repayments on the debt.
Taking advantage of off-plan property investments
There are many potential upsides to off-plan property investment for sophisticated investors. Indeed, anyone with firsthand experience of the industry knows that there’s an extensive list of dos and don’ts when it comes to going off-plan.
I’ll go into some of the most common and important points here.
First is to set out your expectations. The investor must know what they’re looking to accomplish, principally in terms of establishing what sort of returns they’re looking to accrue from the off-plan investment you might want to take on. It’s important that the investor gives this question careful consideration because things are more likely to go wrong if you fail to clearly articulate your expectations.
Once you have established clear goals, the next step is to decide what type of property you’re looking to finance. Off-plan investment is available for many forms of residential and commercial property including care homes and student accomodation as well as residential flats.
Ultimately, it’s up to each individual to make sure they are aware of the different factors that might dictate which type of property will work best for them. Of course, this is true with any property investment but it’s especially pertinent for off-plan because of the potentially long gap between the debt being issued and the development being completed.
This is also an important consideration where location is concerned. It’s not enough to just identify a desirable town or city, responsible investors must consider the long-term outlook for the location in question. For instance, is it near a university or shopping centre? Crucially, with off-plan, the importance of new commercial developments cannot be overstated as they will represent a determining factor on residential property prices for years to come.
However, your responsibilities as an investor doesn’t end there, as you have to give careful consideration to which developers you wish to work with. Usually, the actual deal itself will be structured by an intermediary but for their own peace of mind, investors should also do their research on the developer. There are forms of protection against this problem. For example, some developments are covered by a warranty, such as the NHBC Buildmark.
Despite the political turmoil, the UK property market has continued to perform strongly in recent years. During 2018, house prices nationwide grew by 2.6%. Now is a great time to be investing in the UK market and off-plan investments represent one way you can get immediate returns.
Ultimately, off-plan investment is an untapped source of potential returns for prospective investors but, as ever, a degree of caution as well as due diligence is required to ensure that the investment works for you.