Investing in a property before it’s been built, known as off-plan, has become an increasingly popular way to buy. Investors can achieve greater returns, but some are put off by the idea of buying something they haven’t seen…
As the government strives to get more new-builds onto the market to ease the housing shortage, more and more people – from major investors to first-time buyers – are weighing up the pros and cons of buying a property off-plan. This involves buying when the development is not yet underway but the plans are in place and ready to go.
While it isn’t as straightforward as traditional house-buying, off-plan purchases are becoming more commonplace. With advances in technology, off-plan developments can now provide computer-generated imagery (CGIs). This means you can see what the finished product is likely to look like. Further to this, the financial advantages of such an investment can often outweigh any uncertainty.
A cheaper way to buy
The value of the property during the planning stage is likely to go up by the time it’s completed. This means the potential for capital appreciation is much higher than buying traditionally. Often, you can pay around 10-20% below RICS valuation if you buy at the off-plan stage.
Some developers offer discounts of up to 5% for early investors. The added bonus of getting in early is that you can be more selective about which property or plot you choose.
Furthermore, many developers offer buyers the chance to personalise their properties with fixtures and fittings. The can also provide furniture packs at an extra cost meaning the whole property comes furnished on completion. This is great for both first-time buyers who don’t have their own furniture as well as buy-to-let investors. Offering tenants a property with full, brand new furnishings is a major selling point.
Of course, nothing is guaranteed. It is vital to ensure the development is in an area with strong appreciation potential to start with. For example, some buyer-funded investments in London – where the deposits paid by investors to secure the units at off-plan stage are used to finance the project – came under criticism after developments stalled due to the struggling market.
By contrast, areas in the north and Midlands are among the strongest performing housing markets currently. House prices are rising the most in these areas, and buying off-plan can maximise this. For those wanting to rent their property out, new-builds are popular with tenants and can attract higher rent.
All property investment should be entered into with a long-term outlook, rather than to make short-term gains, due to the nature of the housing market.
Getting a mortgage
It is possible to take out a mortgage on an off-plan property, although different lenders will have varying lending criteria and products available.
Most mortgage offers run out after six months, so you might need to reapply if the development takes longer. This carries the risk of the lender changing their offer down the line. But regular communication with the investment company or developer can minimise this risk. Everyone in the process should be open about the projected completion date. A good mortgage broker should be able to point you in the right direction, too.
If difficult market conditions mean that the mortgage valuation survey comes back lower than the price you originally agreed, you can get a second opinion. However, for savvy investors choosing developments in the most up-and-coming locations, this risk should be minimal.
It is vital to conduct thorough research into the developer, location and property plans when buying off-plan. But buying in this way comes with a wide range of benefits, and is an investment method that will likely increase in popularity as the number of new developments planned across the country rises in line with the government’s targets.