introduction
Below Market Value Property: There are many benefits in buying property for investment off-plan with the main benefit being that property can be purchased at a discounted price. Developers will often offer properties in their developments to the buy-to-let investor market whilst the development is under construction. As the property investor will be exchanging contracts with a deposit, the developer needs to incentivise investors to purchase. Below market value property is often the method to incentivise, with discounts from the final sales price that they would offer to owner occupiers, building in instant equity. In most instances, the further off-plan the development is from completion, the greater the discount is.
Investment opportunities
Buying a future property for today's prices
Investing in a property that is due to be completed in 12-18 months for today's prices will mean that the investor will benefit from any capital appreciation during the build.
Rental values could also appreciate during the build, especially in areas with regeneration projects underway, improving your Expected Rental Value (ERV) and rental yield.
Below is an example of a property with a market value of £150,000 offered with a 10% discount and an 18-month build schedule, a 20% deposit and 3% capital appreciation per annum:
- Market Value = £150,000
- Discount @ 10% = £15,000
- Purchase price = £135,000
- Deposit on exchange @ 20% = £27,000
- Capital appreciation @ 3% per annum = £6,750
- Value on completion = £156,750
- Equity on completion = £21,750
- Return on exchange deposit = 80.56%
Earn Interest on Deposited Funds
If the developer is asking for a deposit over 10% of the property purchase price, they sometimes offer interest on deposited funds, which is discounted from the final payment on completion, providing the property investor with further savings.
Rental Assurances
Rental assurances may also be offered, with the developer providing a contractual guarantee for the gross or net rental returns for the first few years from completion.
The rental assurance provides the owner with a set level of rental income regardless of if their property is occupied, which allows the developer to manage the stabilisation of the development in the local rental market, staggering the release of property at any one time.
Buy brand new property
New build property is typically sold with a 10-year new build warranty, providing the owner with peace of mind that their maintenance costs should be minimal.
Developments that are built for the buy-to-let market are typically specified with more robust and hard-wearing materials, fixtures and fittings that are relatively inexpensive to replace.
Architects are designing developments bigger and better with some offering resident gyms, roof terraces, communal lounges, cinemas, laundry facilities, etc., which are very appealing to the rental market.
Buy the best apartments in the building
Buying off-plan also allows the property investor to select the best units in the development.
Selecting an apartment within a development on a higher floor with a great view will appeal to your prospective tenants, increasing your rental returns and the re-sale value.
How does the developer benefit?
The developer benefits from off-plan sales with improved cash-flow, de-risking their exit as they secure sales before completion and can also benefit from cheaper levels of development finance if they have pre-sales.
What are the risks to look for when buying off-plan?
As off-plan property is not complete, there are certain risks that buy-to-let investors need to be aware of, so that they can make an informed decision before committing to purchase.
Construction is vulnerable to many factors including the weather, supply of materials, delays with development funding, unforeseen circumstances with the build including logistical issues, economic and political change and changes to regulation to name a few. As a result, the completion of a development can be delayed, despite the best efforts of the construction company and the developer.
Identifying up and coming areas is a good method to benefit from future capital appreciation. Regeneration plans can be put on hold and the locality could change during the period of construction, which is out of the developer's control; therefore, prices could also decrease.
Purchasing a property off-plan does not provide the buyer with legal Title until legal completion; therefore, in the worse case scenario and the development was not completed, the purchaser would become a creditor and seek recovery through the administrator and with the building warranty provider (typically up to 10% deposit) for monies invested.
Buy-to-let investors should also ensure that they have their funding in place if they are buying with a mortgage and speak to a mortgage broker before committing to a purchase. The mortgage market may also change with lending restricted, or, enhanced criteria applied to applications.
conclusion
Henley Capital undertake an extensive due diligence process before we offer any development to buy-to-let investors and are selective with what we offer. Book your consultation today, to find out more about buying a property off-plan.
