During the last decades, markets around the world have been trying alternative ways to finance projects. In the construction industry, there have been several options in order to raise the capital required or to finance a project. Bank Loans, equity funds, are some of the most popular amongst others. The option though that most developers seem to prefer is “off plan sales”.
Off-plan property is a property before a structure has been constructed upon it. Pre-constructions are usually marketed to real estate developers and to early adopters as developments so that the purchaser can secure much better finance terms from their lenders.
Property investors or property speculators like to purchase property in this way in the hope of making substantial capital gains. This usually occurs because developers, who offer property for sale off-plan, often offer financial incentives to early adopters. Usually this comes in the form of a discount in response to the sale plan. Furthermore, there may be ample opportunity for capital growth in a rising market and with a development cycle of typically 12–24 months.
It is important to note that for off-plan property to be attractive, there must be a high level of other infrastructure in the immediate area such as a new university, express roads, etc. either already built or due to be built within the next few years.
Off-plan purchasing is a trend that has seen many aspiring homeowners acquire their dream homes by putting their money on nothing more than an architectural plan. It is a route to home ownership that some are not comfortable with, but one which has served others well.
Buying a property off-plan, whether to use as a home or as an investment, incurs more risks than buying a property that has already been built.
Apart from the obvious risks of a constructor who may go of business before construction of the property is completed and the buyer may not be able to recover the monies advanced, the possibility of property values starting to fall before construction is completed is something that buyers should seriously consider.
Another issue with off-plan property is that the finished property may not meet the buyer’s original expectations, either because of subjective reasons or because of material defects.
There are several issues that someone could mention about buying off plan, but I would like to analyze the reason a developer would prefer to sell off plan than to proceed with alternative finance options.
At first, we need to understand that the market trend is very important. If the market is not doing well, prices go down, sales are difficult, then there is no off plan market. No one is interested in buying off plan in a market that is not booming.
If the market is growing, there is a huge demand; prices keep increasing month after month, then developers target “off plan “sales. The question is why? Why would a developer who has a serious business, has the capital to do the business, has access to finance from banks, why would they prefer to sell off plan with big discounts instead of finishing the project and sell at a much higher price which would cover their finance costs and make better profits? At the end of the day, business is all about maximizing the profits with minimum risk possible.
Developers will be tremendously increasing their risk by selling their projects “off plan” if they are doing it in a country with a volatile inflation and currency like Kenya. The reason though they are doing it is because they do not have other options. Developers like to set up projects without having the required assets, cash available to finish the project.
Banks are not willing to finance 100% of any project. Usually, developers decide to start a project where they involve the land owner on a JV basis (that means they do not have to pay for the land). They then raise some small cash, they start building and try to use finance. In order to proceed and finish the project, they need to sell off plan. The question is, what determines the price of an off plan property? Is it really a bargain? Are the developers in such a big need that they will lose money in order to sell?
The reality is that, developers are asking a price which is on the high end, they then offer discounts for off plan sales. Creating nice 3d plans, they offer amazing properties with the best materials and high quality. The prices are obviously connected to the quality of the property. Same time, developers offer projections for possible ROI via buy to let schemes and capital growth.
Fact is, in a good case scenario, if the project is delivered and on time, this has nothing to do with the initial advertised plans and quality. Even if it does, was the actual initial price such a bargain? Would you lose if you were to buy the property on completion where you could actually inspect the quality, and you would know the real price at the moment of sales?
Even if you got a 20 or 30 percent discount from the price that the developer has been marketing his properties, you would need to do some calculations in order to make sure that you are getting a good deal.
Money is maybe the most valuable asset in this world. The cost of money is very important. If you take a loan with 18%+ interest rate, that would now be a cost that you have to deduct from the “discount “ offered to you by the developer. The time required for the property to be ready is also very relevant. For example, if it will take 18 months to get your property ready for use, then you should multiply the cost of the loan by 1.5 times. Already there is a 27% cost. You are now only making 3% out of the 30% discount. That is, if we take for granted that the prices will be the same as that the developer was initially asking and will not be less.
The question is, is it worth the risk to buy off plan, speculating that future values (on average between 18 and 24 months) will be the same, hoping that the quality provided will be the one promised and betting on the fact that the developer will manage to complete the project?
The truth is that the concept of “off plan sales” is there to serve more the sellers than the buyers. If it was not like that, then developers would rather prefer other ways to set up their projects.
Usually, when a real estate market is going through a period of growth, buyers get over excited and rush into decisions without considering all the risks and the benefits of a property purchase.
Off plan sales have been boosting real estate markets over the years but they have also caused serious loses to investors.
If someone decides to proceed with an off plan investment, avoid problems and to minimize the risk, they need to follow at least some basic steps.
Get a solicitor who specializes in off-plan contracts, who will make sure that the terms and conditions of the contract are on your favor and will cover you in case of a developer that will go bust. It is also very important to determine in the contract all the terms and conditions in order to make sure that what you see is what you are going to get. The solicitor also has to make sure that he or she will conduct a very deep due diligence in order to ascertain that the developer can provide what they are promising and there are no hold backs from banks or other creditors.
It is also recommended to hire a professional independent valuer who will make an assessment concerning the current and future value of the property. This is for you to be able to negotiate a good price with the seller.
It is also a must to hire an engineer or quality surveyor who will be following up with the project and the quality provided to your property in order to make sure that you will get what you are paying for.
The above are costs that you have to consider and add them to the actual purchase cost in order to understand if the price you have been offered is actually lucrative or not.
It might sound a bit more complicated than what the big advertising banners and billboards say, and actually it is. So, buying off plan could be an option but you have to do it properly for you not to lose but BENEFIT.
By Kosta Kioleoglou REValuer,(Tegova)
Civil Engineer Msc – DBM
Founder and CEO of Capital Plus ltd
Chief Strategist (CSO) for the East African Region
Director of Engineering – Property Appraisal & Valuations
for Taylor Scott International PTE.