Off plan property investment can provide buyer with access to new build properties designed to suit the needs of the local property market. In this feature, Experience Invest explores the risks and rewards of the market segment and highlights the questions every investor should ask.
What is off plan property?
Off plan property investment is a unique segment of the UK housing market that has experienced significant growth over the past decade or so. It's an area where there are some valuable benefits on offer to investors
, as well as specific factors to consider and questions to ask.
If this is an option you're considering, it's wise to start off by doing some research and finding out as much as you can about investing in property at the off plan stage and what it involves.
What is off plan property investment?
Your ultimate guide to profiting from new build rental properties
Off plan property investment: the basics
Starting off with a fundamental question: what exactly is off plan property investment?
It's simply the process of acquiring a property either before or during the construction process. Essentially, you're buying the property before it has been built.
There are a number of reasons why this concept has moved into the mainstream in recent years and why it's an appealing option to many investors.
One of the key factors in the emergence and growth of off plan investment was the 2008 financial crisis, which resulted in tighter lending restrictions and a reluctance among many banks and financial institutions to lend money. As well as impacting consumers, this affected businesses including construction and development firms.
One of the key factors in the emergence and growth of off plan investment was the 2008 financial crisis
, which resulted in tighter lending restrictions and a reluctance among many banks and financial institutions to lend money. As well as impacting consumers, this affected businesses including construction and development firms.
As a result, there was an increase in property developments funded by individual investors and buyers, who effectively took the place of the bank in providing the necessary capital for housing projects to be completed.
There were some compelling reasons why many investors were prepared to step up and provide the money needed for vital building work to go ahead. Most notably, it's common for off plan investments to offer an upfront discount, with investors sometimes able to get up to 10% off the price of a bricks-and-mortar asset if they make an early commitment.
This increases scope for the buyer to benefit from long-term capital growth, which can begin as soon as the acquisition is completed. If prices in the local market go up by 5% during construction, for example, your off plan asset will benefit from the same appreciation.
As far as regular income is concerned, some off plan developments are able to deliver returns on the initial outlay, meaning the buyer will start to see their investment generating financial results before the development phase is even completed.
Some investors also take reassurance from the fact that buying off plan means acquiring a brand new property with all mod cons - something that will appeal to tenants once construction is finalised and the home is ready to be rented out.
Keys to off plan investment success
Once you've made the decision to proceed with off plan property investment, you can start to think about positive steps that will increase the chances of the venture being a success.
Here are some of the most beneficial things you can do:
Set clear goals
Success is about achieving your goals, so before entering into an investment you need to have a clear idea of exactly what you want to gain from the venture. You might be looking for an investment that will give you a reliable second income, or you could be more interested in long-term capital growth or portfolio diversification
Establishing clear objectives will help to guide your investment decisions and enable you to measure success more accurately.
Find the right property type and location
Knowing your goals will make it easier to make key investment decisions, such as what sort of property you want to acquire, and where. If you're prioritising steady rental yields, for instance, you might gravitate towards buy-to-let property in a high-demand area, like the London commuter belt.
You should also consider what is the right investment location for you, taking into account factors like the nature of the local market and whether it suits your investment goals.
You should also consider what is the right investment location for you
, taking into account factors like the nature of the local market and whether it suits your investment goals.
A quirk of off plan property investment - one that can make some buyers think twice about agreeing to a purchase - is the fact that you're buying an asset that doesn't physically exist yet.
Fortunately, there are steps you can take to help you feel more confident about making this commitment. Choosing a property that's protected by the NHBC Buildmark warranty scheme or an industry equivalent, for example, provides certain assurances including cover for the cost of remedial work if the builder fails to meet certain standards.
Fortunately, there are steps you can take to help you feel more confident about making this commitment. Choosing a property that's protected by the NHBC Buildmark
warranty scheme or an industry equivalent, for example, provides certain assurances including cover for the cost of remedial work if the builder fails to meet certain standards.
You can reduce the risk of anything going wrong in the first place by conducting checks on the developer. Examining the company's past projects and analysing its track record for delivering projects on time and to the required standard can give you peace of mind.
Important questions to ask
The process of preparing for an off plan property investment should include as much information gathering as possible. You can get useful insights and guidance by asking some key questions
that are specific to this type of investment and your own personal situation.
- What advantages do new-build properties have over pre-owned?
Acquiring a brand new property is one of the benefits of off plan investment, so it's worth boosting your understanding of the benefits of new-build housing, compared to pre-owned homes
. For many buyers, the biggest advantages include:
- Structural warranties
- Energy efficiency
- Higher safety and security standards
- Can I get a mortgage for off plan investment?
Generally speaking, off plan investments are cash-only, and this will certainly be the case if you're buying in a non-mainstream property sector like UK student accommodation investment
. While it's possible that buy-to-let homes could be mortgageable upon completion of building work, that's something that would have to be negotiated between the individual buyer and the lender.
- How is my money protected during construction?
Experience Invest protects client funds by placing them in a solicitor's account and only releasing them upon architect certification. A key part of the off plan process is the specific allocation of funds for construction, which helps to minimise the risk of the developer going into liquidation. Even if the development firm does run into difficulties, the build has essentially been paid for, so a new team could be brought in to finish the project.
- Are there any hidden costs?
One of the reassurances you get when dealing with Experience Invest is that there are no hidden fees or additional running costs payable by the investor. Rental returns are paid net - meaning all charges, maintenance and management fees are already deducted. One external financial factor you might need to be aware of is the landlord licence fee that is charged by some local authorities. This is something you should check with the council in the area where you're buying.
- Can I 'flip' an off plan property?
Yes, off plan property is certainly well-suited to 'flipping
' (buying and then selling on at a higher price when the development is completed). If you're able to get in early and secure an initial discount, you might be able to secure a good return by selling the property once it's ready for renting and there has been some price growth in the market. If this is something you're considering, yieldbase
, Experience Invest's dedicated resales platform, might be able to help.
Risks and rewards
Like any investment, an off plan property purchase does come with certain risks that you should be sure to consider before committing to an acquisition. Giving some thought to the most common risks will help you come up with a plan for how to mitigate them.
Potential issues to be aware of in off plan property investment include:
- The developer going into liquidation
- Delays to completion
- Concerns over cash-only investment
- Yields decreasing after the initial assured period
- Market prices falling during and after construction
It's important to note that there are steps you can take to minimise risk in off plan property investment
and maximise your chances of seeing the best returns.
As discussed above, conducting background checks and working with a well-established, experienced developer
can help you address concerns around the company going into liquidation or failing to meet deadlines.
Warranty schemes provide assurances around the quality of the build, while the careful allocation of investment funds helps to reduce the risk of developments not being completed.
You can also give yourself peace of mind by asking for regular updates on the progress
of the build. Project managers and architects are sometimes able to provide this information, or you could use an independent monitoring service.
When it comes to the long-term performance of your investment - in terms of rental yields and capital growth, for example - you can feel confident of seeing results if you have done the right research, chosen your asset class carefully and picked the most suitable location. UK property has a strong track record for delivering returns, proving itself to be a reliable, resilient investment
many times in the past.
Backed up by solid planning and preparation, you can expect to enjoy some of the most attractive rewards of off plan property investment, such as:
- Strong capital growth thanks to early discounts and the potential of wider market appreciation during construction
- High tenant demand driven by the appeal of new-build, high-quality property
- New-build warranty protection
- Rental assurances provided by certain investment schemes
If you're interested in learning more about off plan property investment and the opportunities it offers in the UK, you can a free consultation with Experience Invest
or give us a call on +44 (0) 207 834 1113
Opto Student Cardiff
Set to become the No.1 student
complex in the city
- 7.5% NET return per annum for 3 years
- Delivered furnished and fully managed
- Excellent city centre location