Buying Off-Plan Property: A Guide for Investors and Landlords
by Property Investments UKThe Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
If you are looking to buy a property then buying a property on an off-plan basis is one option you might consider. Here’s what off-plan property is, what are the pros and cons of buying it, and what you need to know if you are thinking of buying a house or flat off-plan.
What Exactly is Off-Plan Property?
Off-plan property refers to property that hasn’t been built yet but is being offered for sale by the builder or developer based on their plans for it.
Buying a property off-plan is an alternative to waiting until a new build is completed and an alternative to buying an existing house.
Off-plan property is new build property. Many if not most new build housing developments sell some of their new houses and flats on an off-plan basis.
According to Hamptons' research last year 37% of new homes sold in England and Wales found a buyer before completion.
Off-plan isn’t the same as off-market property.
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Advantages of Off-Plan Property Investments
- An off-plan property is a property that is brand new. Buyers benefit from contemporary design, the latest fixtures and fittings and high standards of energy efficiency. Off-plan property should have low running and maintenance costs.
- Off-plan property always comes with a new build warranty. For example the 10-year NHBC Buildmark warranty.
- Buying off-plan often offers the opportunity to choose the exact kitchen, bathrooms, carpets and décor you want. You may even be able to customise the floor plan to suit your requirements.
- Buying off-plan can help to ease buyer chains. The buyer can take ownership and move in as soon as the property is completed. Unlike with a conventional purchase, there is no need to wait until the current occupier moves out.
But Let's break this down further...
Competitive Pricing and Potential Discounts
- Off-plan properties often come with lower initial purchase prices compared to completed properties, as developers aim to generate early interest and secure sales. This price advantage can result in significant savings for investors and the potential for greater capital growth.
- Developers may offer various incentives to attract buyers, such as reduced reservation fees, bulk-buy discounts for multiple property purchases, or other promotional deals. These incentives can further enhance the financial benefits of investing in off-plan properties.
- Early-bird discounts are another advantage for investors who enter the market at the initial stages of development. By committing to a project early on, investors can secure favourable pricing before demand drives up the value of the property.
- During the construction period, there is a possibility for price appreciation as the property nears completion. This increase in value can lead to increased equity for the investor before even taking possession of the property.
- Opportunities to negotiate favourable payment plans or financing options with developers can make off-plan properties even more attractive. In some cases, developers might offer interest-free payment plans or be more flexible in terms of down payments and instalment schedules.
Capital Appreciation Prospects
- One of the primary attractions of off-plan property investments is the potential for significant capital growth. As the development progresses and the surrounding area improves, the value of the property can increase, offering investors substantial returns on their investments.
- Off-plan investments allow buyers to secure properties at today's prices, with the expectation that the market will appreciate over time. This can be especially beneficial in areas where there is high demand for housing, a strong local economy, or significant infrastructure investments underway.
- Capital growth can also result from improvements and enhancements made to the property during the construction process. For example, investors who choose to upgrade fixtures, finishes, or layouts can add value to their property, further boosting potential returns.
- A well-chosen off-plan investment can act as a hedge against inflation, as property values tend to rise over time. As a tangible asset, real estate often performs well during periods of economic uncertainty, providing investors with a degree of financial security.
- The potential for strong capital appreciation in off-plan properties can be particularly attractive for long-term investors seeking to build wealth through a diversified real estate portfolio.
Customisation and Personalisation
- Investing in off-plan properties provides buyers with the unique opportunity to customise and personalise their property according to their preferences and requirements. This can include selecting the layout, finishes, fixtures, and other design elements that best suit their needs and tastes.
- Customisation can not only enhance the overall appeal and enjoyment of the property for the owner or tenants but also potentially increase its market value. A well-designed, personalized property can stand out in the market, attracting higher rental rates or resale values.
- Involvement in the design process can give investors a greater sense of ownership and satisfaction, as they have the chance to shape their investment from the ground up. This can lead to a stronger emotional connection with the property and a deeper understanding of its value and potential.
- Developers may offer a range of design options and packages for off-plan investors, making it easier to create a property that caters to specific target markets or demographics. This can be a strategic advantage for investors looking to maximize rental income or appeal to a particular buyer segment.
- Customizing an off-plan property can also help investors to future-proof their investment, as they can incorporate the latest technology, eco-friendly features, or design trends into the property, ensuring it remains attractive and relevant in the years to come.
Modern Amenities and Energy Efficiency
- Off-plan properties often feature state-of-the-art amenities and facilities, which can make them more appealing to potential tenants or buyers. These modern features can include advanced security systems, smart home technology, communal leisure facilities, or high-quality building materials.
- New-build properties are typically constructed to meet the latest building regulations and energy efficiency standards. This can result in lower energy consumption, reduced utility bills, and a smaller carbon footprint, making off-plan investments more environmentally friendly and cost-effective in the long run.
- Energy-efficient properties can be particularly attractive to tenants and buyers who prioritize sustainability and environmental responsibility. This growing market demand can translate into higher rental rates or resale values for off-plan investors.
- As off-plan properties are new constructions, they often require less maintenance and repair work compared to older, existing properties. This can lead to lower ongoing costs for investors and help to preserve the property's value over time.
- Investing in off-plan properties with modern amenities and energy-efficient features can contribute to a more diversified and resilient investment portfolio, as these properties are likely to remain in demand and maintain their value even in changing market conditions.
Diversifying Investment Portfolios
- Incorporating off-plan properties into an investment portfolio can provide valuable diversification, reducing overall risk and increasing the potential for long-term growth. By spreading investments across different property types, locations, and development stages, investors can better manage market fluctuations and unforeseen challenges.
- Diversification can also help investors capitalize on a broader range of market opportunities, as off-plan investments may provide access to up-and-coming neighbourhoods, emerging property trends, or niche markets that may not be available through traditional property investments.
- Off-plan investments can complement existing property holdings by balancing out the portfolio's risk profile. For example, an investor with a portfolio of older, income-generating properties might invest in off-plan projects with strong capital growth potential to offset potential declines in rental income or maintenance costs associated with ageing assets.
- By including off-plan properties in their portfolio, investors can take advantage of different market cycles and stages of the property development process. This can lead to a more balanced and resilient investment strategy, better equipped to weather economic downturns or shifts in the property market.
- Diversifying with off-plan investments can be especially beneficial for investors looking to expand their real estate holdings while minimizing exposure to risks associated with any single property or market segment. This diversified approach can contribute to more stable returns and stronger overall investment performance.
Is It Cheaper?
Buying off-plan can offer the opportunity to buy a house or flat at a competitive price.
Buying off-plan allows you to agree to buy at today’s price. This can be attractive when house prices are rising quickly. In this case, your property could be worth more than you pay for it once it is completed simply because prices have risen in the meantime.
For example, say you agree to buy an off-plan apartment at a price of £200,000 now and it will be completed in one year. Should house prices rise 10% over the year you will in theory make £20,000 when you eventually take ownership.
You may get an off-plan discount. New build developers may offer very attractive off-plan pricing in order to kickstart their development and bring in some cash. In some cases, you may be able to buy off-plan at below-market value.
Developers selling houses and flats off-plan may offer generous buyer incentives in order to close the deal. For example, they may offer a contribution towards a buyer’s legal fees, removal costs and free fixtures and fittings such as carpets.
However, an off-plan may not necessarily be any better value than buying a property which already exists. New build properties generally sell at a premium. According to this research, a new build property in England can sell for a 19.3% premium compared to an existing one.
- You will have to wait for the property to be built before you can take possession. Depending on the development this could be a few months or a few years.
- It can be very hard to visualise what the completed property and the wider new build development will look like when buying off-plan. The finished property may not look like the sketches, CGIs and plans you were provided with when you bought off-plan.
- The off-plan property and the wider development may not turn out as expected. Normally when buying off-plan the developer reserves the right to change the plans if they see fit.
- The completion of an off-plan property may be delayed, which can cause problems. Off-plan completions may be delayed by labour and materials shortages or bad weather etc.
- With an off-plan purchase, you will normally have to pay a non-refundable deposit when you agree to buy the property, even though it may not actually exist yet.
- You may not be able to get out of buying a property off-plan, once you have signed a reservation agreement to buy. If you do you will probably lose your deposit. This can be a serious problem if you change your mind, or if your circumstances change, before the property is completed.
- Off-plan developers often have a clause in their reservation agreements which allows them flexibility in the completion date. For example, you may be given ‘short’ and ‘long’ completion dates. The short date is an estimate of the likely completion date, but they are under no obligation to complete it until the long date.
- Your property may be part of a construction site for some time when you buy into a new development. You (or your tenant) may have to put up with building noise, dirt and disruption etc.
- As with any new-build property, a property bought off-plan may have many snags or faults. It may take time for these faults to be fixed.
- When you buy off-plan it may be difficult to resell your property at a later date if you want to or need to. For example, if your property is on a development which is still being built out buyers may prefer to buy a brand-new property rather than yours.
Let's go into more detail...
Project Delays and Cancellations
- One of the primary risks associated with off-plan property investments is the possibility of project delays or even cancellations. Construction timelines can be affected by various factors, such as weather conditions, labor shortages, or issues with building permits, which can significantly impact the expected completion date.
- Delays in the construction process can lead to increased holding costs for investors, as they may have to wait longer than anticipated to start generating rental income or to sell the property. This can put financial pressure on investors who rely on income from their properties to cover mortgage payments or other expenses.
- In some cases, developers may face insolvency or other financial challenges that result in the cancellation of the project. Investors may lose their initial deposits or face difficulties in recovering their funds, leading to substantial financial losses and a negative impact on their overall investment strategy.
- To mitigate the risks associated with project delays and cancellations, investors should conduct thorough due diligence on the developer, closely monitor project progress, and stay informed about any potential issues that could affect the construction timeline.
- It's also essential for investors to have contingency plans in place to manage the financial impact of unforeseen delays or cancellations. This could include maintaining adequate cash reserves, securing flexible financing options, or exploring alternative investment opportunities in case the off-plan project does not proceed as expected.
Financial Risks Due to Market Volatility
- plan property investments can be exposed to financial risks arising from market volatility and economic fluctuations. Changes in property prices, interest rates, or currency exchange rates can all impact the profitability of an off-plan investment, potentially leading to lower returns or even financial losses.
- Market downturns can result in decreased property values, making it more challenging for investors to sell their off-plan properties at a profit or to secure favourable mortgage terms. Additionally, reduced demand for housing can lead to lower rental rates, which can affect the anticipated rental income from the investment.
- Interest rate fluctuations can have a significant impact on the cost of financing an off-plan property investment, particularly for investors who rely on mortgages or other types of debt. Increases in interest rates can raise the cost of borrowing, potentially affecting the investor's ability to service their debt and maintain a positive cash flow.
- Currency exchange rate fluctuations can be a concern for international investors who invest in off-plan properties in foreign markets. Changes in currency values can impact the value of the investment, as well as the cost of repatriating profits or servicing debt in the investor's home currency.
- To manage these financial risks, investors should carefully assess their risk tolerance and financial capacity before investing in off-plan properties. Additionally, staying informed about market trends and economic conditions, and diversifying investments across different markets and asset classes can help to mitigate the impact of market volatility on the investor's portfolio.
Developer Reliability Concerns
- The success of an off-plan property investment heavily depends on the reliability and competence of the developer responsible for the project. Issues such as poor management, financial instability, or a lack of experience can lead to substandard construction quality, delays, or even the failure of the project altogether.
- Investing in a project managed by an unreliable developer can result in financial losses, damage to the investor's reputation, and considerable stress and frustration. It's crucial for investors to thoroughly research the developer's track record, financial stability, and reputation in the industry before committing to an off-plan investment.
- Investors should also consider the developer's previous projects, looking for signs of consistent quality, timely delivery, and satisfied customers. This can help to gauge the developer's ability to deliver on their promises and to manage the project effectively.
- Communication is another critical factor in evaluating a developer's reliability. Transparent and regular communication from the developer about the project's progress, any potential issues, and their plans to address them can indicate a trustworthy and responsible partner in the investment process.
- In addition to conducting thorough due diligence on the developer, investors can also mitigate risks by diversifying their investments across multiple projects and developers. This approach can help to spread the risk and reduce the potential impact of any single project's failure or underperformance.
Difficulty in Visualising the Final Product
- One of the challenges associated with off-plan property investments is the difficulty in visualizing the final product based solely on architectural plans, renderings, and marketing materials. This can make it harder for investors to accurately assess the property's potential value, marketability, and suitability for their investment goals.
- The risk of misinterpretation or misunderstanding of the project's specifications can lead to disappointment or dissatisfaction with the finished property. Investors may find that the actual size, layout, or quality of the completed property differs from their initial expectations, which can impact its rental or resale potential.
- To mitigate this risk, investors should carefully review all available information about the project, including floor plans, specifications, and any virtual tours or show homes provided by the developer. Additionally, visiting similar completed projects by the same developer can provide valuable insights into their construction quality and design standards.
- It's also essential for investors to ask questions and seek clarification from the developer or their sales representatives about any aspects of the project that are unclear or uncertain. This can help to ensure that the investor has a comprehensive understanding of what to expect from the completed property.
- Investors can further protect themselves by including specific clauses in the purchase agreement that outline the developer's obligations with regard to quality, finishes, and other key aspects of the property. This can provide a legal recourse in case the final product does not meet the investor's expectations or the agreed-upon standards.
Limited Immediate Rental Income and Cash Flow
- Off-plan property investments typically do not generate immediate rental income, as the property is not yet completed and available for tenants. This lack of immediate cash flow can pose challenges for investors who rely on rental income to cover their expenses or finance their investments.
- During the construction period, investors may need to cover mortgage payments, property taxes, and other holding costs without the benefit of rental income to offset these expenses. This can put a financial strain on investors, particularly if the construction process is delayed or if they face unexpected additional costs.
- To manage this risk, investors should carefully assess their financial capacity and cash flow requirements before committing to an off-plan property investment. This may involve creating a detailed budget, securing flexible financing options, or maintaining adequate cash reserves to cover holding costs during the construction period.
- Investors can also explore strategies to mitigate the impact of limited cash flow during the construction period, such as negotiating favourable payment terms with the developer, seeking rent guarantees or other income protection measures, or diversifying their investment portfolio with income-generating properties.
- It's important for investors to have a clear understanding of the expected timeline for construction and completion, as well as the potential rental income and cash flow once the property is completed. This can help to ensure that the investment aligns with the investor's financial goals and risk tolerance, minimizing the potential for financial stress or disappointment.
Buying an off-plan property can involve specific mortgage issues. Most mortgage offers are only valid for six months. If the off-plan property takes longer than six months to complete your mortgage offer may expire. You may need to find a new mortgage offer which may be more difficult to find/be more expensive than you anticipated when you agreed to buy off-plan.
Do Off-Plan Properties Make Good Investments?
The answer as to whether off-plan property makes a good investment can be yes, no, or maybe! It depends on how prices move in the period between when you agree to buy and when your property is completed.
If prices have risen in the meantime your property could be worth more than you paid for it so it could certainly be a good investment. If prices have fallen in the meantime your property could be worth less than you paid for it so it could not really be considered a good investment.
Some owners and investors have made money by flipping their off-plan purchase and selling it for more money before or when it is completed. This generally only works in a rising property market, however.
Are Off-Plan Properties Good for Buy-to-Let?
Off-plan properties can be attractive to buy-to-let investors.
Off-plan properties are brand new and so very appealing to tenants. They often let very easily because of this. New properties are also usually energy efficient, something else which is attractive to tenants. New properties also require little or no maintenance or repairs so can save landlords money, time and potential problems with tenants.
One snag with buying an off-plan property as a buy-to-let is the time that it can take to take ownership of your property and start letting it out. If the letting market has changed, if demand has changed and if rents have changed, then the property may be a very different buy-to-let proposition.
As with any buy-to-let investment, it is important to research the market before buying off-plan. Try to estimate what demand, rents and so yield will be once the property is completed.
It is possible to buy off-plan property investments which come with a rental guarantee of a specified rent or yield for a number of years. It is wise to consider whether this is the best way of investing for you, and what will happen when the guarantee ends.
Can You Make Money Buying Off-Plan?
Yes, you can make money from buying off-plan in some circumstances. However, this is entirely reliant on being able to buy below market value and/or property prices rising between the time you agree to buy off-plan and the time you pay for it and take ownership. Although this has happened in the recent past, and many people have made money from buying off-plan, this will not necessarily be the case in future.
Is It Safe?
It is fair to say that buying a property off-plan involves some risks that are not present when buying a property that is already built.
There is a risk that a property bought off-plan may be completed late, may not be completed as planned, or even may not be completed at all.
Although the risk is small there is a risk that the developer of an off-plan project could fail or go into administration before the development is completed. In this event, the money you have paid could be lost. With so-called buyer-funded developments buyer deposits and stage payments are used to build out the development. In a small number of cases, their developers have failed and buyers have lost money as a result.
Checklist: How to Buy Off-Plan
Here are some points to consider if you are thinking of buying or investing in property off-plan:
- Check the reputation of the developer or builder. Are they well-known, with a well-established name? Do they have a good reputation and good customer reviews? Do they have a track record of completing new developments on time? Or are they an unknown name with no track record of completing developments?
- Is the developer financially sound? How is the off-plan development being funded? Is the off-plan development a buyer-funded one? If it is then extra caution is advisable.
- Does the off-plan property offer good value compared to the alternatives? Check the selling prices of similar already-built properties in the same area to see how much they sell for.
- Check the timescales being suggested for the completion of your property. Are they realistic? If the development has already started have the existing properties been completed on time?
- Is your deposit protected by any kind of guarantee or any kind of insurance-backed guarantee? What will happen if the developer goes bust? Will you be able to get your money back?
- Conveyancing for off-plan property. Once the property is ready the conveyancing procedure works in exactly the same way as for a conventional purchase and can be carried out by a solicitor or licensed conveyancer.
It is also advisable to take expert legal advice before agreeing to buy an off-plan property and signing a reservation agreement to buy one.