Investor insight – are off-plan developments a good investment?

A property development and investment company has claimed that the ongoing shortfall in housing is prompting strong demand for high spec off-plan developments.

Despite the government’s efforts to ramp up housebuilding in recent years, there remains a ‘chronic shortfall’ in the number of new-builds across the UK compared to growing demand for homes. This has been further exacerbated by the pandemic.

Recent figures from homeless charity Shelter and global property firm Savills found that 84,000 fewer homes were delivered in 2020 – with overall output dropping from 255,000 year-on-year, to just 171,000 homes in 2020/2021.

According to the findings, some 116,00 construction jobs could go by this year without urgent government action. Under the worst-case scenario, the government could fall significantly below its own housebuilding targets, with as many as 318,000 new homes lost over the next five years.

The pandemic and its many knock-on effects have undoubtedly contributed to the slowdown in construction, with many sites closed for periods and the supply of materials interrupted. Brexit has simply compounded these issues, causing problems with both labour and supply. 

Thirlmere Deacon believes the ongoing shortfall in housing is leading to greater demand for off-plan investment opportunities. It says off-plan property investment is now spread more evenly across the UK, with regional markets such as Manchester a prime beneficiary.

Recent research from Hamptons revealed that there were more flats sold off-plan in the North West and North East than anywhere else in England and Wales last year. In the North East, some four in five new-build flats were sold off-plan, while in the North West the comparable figure was 68%.

Why is this the case?

Investors are increasingly diversifying their property portfolios to spread their risk and, as such, don’t want to be reliant on the success of one strategy, region or development. 

With this in mind, many are opting to invest in off-plan as it offers ‘great benefits, allowing investors to put capital to good use, from the comfort of their armchair’. 

Stuart Williams, founder and chief executive of Thirlmere Deacon, said: “Newcastle is a great example of this, with figures showing that 91% of flat completions were sold in advance, with a large buy-in from investors.”

He added: “Investing in a property before it is built has become more attractive to investors throughout the UK and overseas. It is seen as a way to purchase a property at a discounted price ahead of a price rise on completion, essentially giving investors instant equity in the property once completed.”

Williams argues that one of the big advantages is that investors are securing the property at today’s market value (possibly less), giving time for a significant increase in the value by the time the development is completed.

“It is not uncommon for some investors to have made up to 100% growth on the value of their unit between exchange of contracts and completion,” he claimed.

“It’s certainly not uncommon for investors to double their initial deposit during the build period. For example, Investor A commits to buy a property three years off-plan in Manchester for £200,000 and puts down a 20% deposit (£40,000). Growth in the city is approximately 7% per year and over three years it reaches 21%, resulting in the value of the unit being approximately £242,000. The investor could sell the property, take out his initial £40,000 and a further £42,000 profit.”

Williams continued: “Of course, there are no guarantees, so it is important to be investing in areas with strong demand, consistent growth potential and also invest with developers who have financing in place and are not using the investor’s funds to complete the build.”

He said there are many pros and cons when it comes to investing in off-plan property. But as the government is keen to get close to their target of 300,000 new homes each year (in order to meet the current, and ever-increasing, demand), Williams believes there is a great opportunity for investors to cash in on this undersupplied market.

“Investors generally are required to pay a deposit in order to exchange contracts (typically 20-30%), with the balance of the funds due on completion,” Williams explained. “Occasionally, developers will be required by their finance lender to request an additional payment from investors throughout the development.”

“The other tools that are making it much easier for investors and buyers to make decisions to invest in off-plan property is the computer-generated images (CGIs), many of which now can be difficult to tell if they are in fact CGIs and not the real thing.”

Below, Williams offers up some top tips for investing in off-plan.

Research the developer

Before investing in off-plan developments, it is vital that investors carry out thorough background research on the developer for the off-plan investment they are considering. Companies House is a good reference on a developer’s financial status, and their corporate brochure along with property portals like Rightmove will show their track record of properties developed and sold.

Mortgages

Many investors think it is extremely complex when getting a mortgage on an off-plan property. This is a myth! It is very possible to take out a mortgage on an off-plan property, although the criteria is different from lender to lender.

A bit of advice. Don’t submit a full application until the development is within 3-6 months of completion. Time and time again, we see mortgage brokers advising investors to submit an application (as an excuse to charge their fee upfront), then when it comes to survey, there is nothing for the surveyor to view as the property is not ready yet.

It is important to secure a decision in principle (DIP) from the lender – this is essentially the lender doing a quick review of your situation and giving a yes or a no to you. Make sure you declare all of the information they request as you could run the risk of a declined application if you aren’t fully honest about that missed/late loan payment two years ago, or that high credit card balance.

Securing your off-plan investment

The process of securing an off-plan property investment is fairly simple, with an initial reservation fee. Once the appropriate documents have been signed and exchanged, developers offer attractive payment terms. They will require a deposit with the balance paid on completion. This reduces the outlay of an investor, assisting cash flow and incentivises developers to complete their projects on time.

Capital appreciation

Although it can take up to two years to complete a new development, investors can benefit from capital appreciation from the moment you reserve your investment, so the earlier you invest, the better.

Strong demand for new developments can lead to a significant uplift in valuations with the potential to make a short-to-medium-term paper profit even prior to completion.

Legal issues

Buying an off-plan property does not change the process of due diligence and legal advice. Property development companies are able to offer a full range of services, from research into relevant properties through to the raising of mortgage funds, independent legal advice and more.

This ensures that you are able to focus on finding the right investments to suit your portfolio and investment strategy.

Tenant income

Once you have secured your property and the development has been completed, it is time to find a tenant and turn on the rental income stream.

If we look at the new residential development at Wardour Point on Regent Road, Manchester, which will complete in summer 2023, apartments start at £219,000 with a projected 7% rental yield.