Why Are Seasoned Investors Buying Property Off-Plan?
There are many reasons why investors choose property – its diversification value, resilience and above all, its ability to deliver high rental returns and capital growth. While the majority of properties can deliver all of these benefits and more, off-plan property can not only diversify a wider portfolio of completed assets, but it can maximise your opportunities for rental and capital growth.
The process of buying property off-plan differs from purchasing a completed and tenanted buy-to-let property, which also means that it comes with several of its own benefits and drawbacks. But why exactly are more seasoned investors turning to the off-plan property market? Below, we discuss what off-plan property is and the opportunities it offers.
What is Off-Plan Property?
Buying property off-plan generally involves an investor – or homeowner – purchasing the property either before or during the construction process. The main incentive for buyers purchasing off the plan is that the property is usually marketed at a much lower price than its forecasted value on completion. With this offering significantly more opportunities for capital growth, it’s no surprise that seasoned investors are turning to the off-plan market.
In terms of the actual process of purchasing an off-plan property, the investor will usually pay a reservation fee to hold the property, shortly followed by the deposit. The deposit amount will vary depending on the developer, but this could be anything from 10-30% of the property’s overall value. Again, the high leverage of deposit throughout the build phase is another attractive characteristic of investing off the plan.
Potential for Strong Capital Growth
Both seasoned and first-time investors are looking to the off-plan market for many reasons, but capital appreciation is the main reason. The average build period for an off-plan property is around three years, which means you’ll be entering a different housing market when the development completes. More often than not, the discounted price of the property, combined with the natural increases in the local market, is what causes a higher rate of capital growth.
With a considerable profit made during the build phase, many investors decide to sell the property immediately upon completion. Although this can be an effective short-term strategy, investors will stand to make bigger profits by renting out the property over a long-term period. This will not only provide a monthly rental income, but it will also give more opportunities for even more capital growth.
The Off-Plan Market Status
While the buy-to-let sector aims to navigate around stricter lending regulations and tax changes, this is another reason landlords are buying property off plan as opposed to completed.
Generally speaking, with the extra tax considerations and increased costs for landlords, investors are searching for more lucrative property investment opportunities. Off-plan property in emerging locations is becoming even more popular amongst these investors, especially for those looking for bigger capital growth.
Emerging locations are usually described as those undergoing extensive regeneration, which when combined with the potential for capital appreciation with off-plan property, allows for greater returns in the long-term.
In recent years, landlords have faced several new challenges, especially surrounding the changes to tax relief. In April 2020, Section 24 of the Finance Act was brought into place, which meant that landlords were no longer able to benefit from any kind of tax relief. Before this point, landlords had the opportunity to claim tax relief by offsetting mortgage interest costs.
Furthermore, all rental properties are required to have minimum EPC ratings of E, which in turn, could lead to a more expensive investment. Landlords with intentions of letting out houses in multiple occupation (HMOs) will also need to consider applying for new licenses which ensure the properties and landlords follow certain conditions.
These challenges have caused a wealth of different – and unexpected – issues for landlords, many of which have deterred prospective investors in the past. However, buying off-plan property can address several of these issues. For example, investing off the plan means you’ll eventually have a brand new apartment which will usually be energy efficient and will adhere to the myriad of conditions landlords are now facing in the buy-to-let market.
Is Off-Plan Property a Good Investment?
Generally speaking, buying off-plan property can often maximise the potential of an investment portfolio. Not only does the build phase of these properties allow for greater capital growth, but the addition of this investment in a wider portfolio provides increased diversification. In turn, an investor could benefit from both the rental income of their completed properties as well as the long-term capital appreciation of an off-plan property.
While buying off-plan property provides greater potential for capital growth, investing in emerging locations offers even more opportunities for price increases. Emerging locations typically forecast greater capital growth in both the short- and long-term, with regeneration schemes and increasing employment opportunities drawing more tenants – and investors – to the area. As a result, investors buying off-plan property in emerging locations will usually benefit from both the natural growth in the property itself, as well as the local economy.
Why Buy Off-Plan Property?
Investing off the plan isn’t for everyone, but the opportunity to enter the market with discounted purchase prices is often an appealing prospect. Not only are there considerably more opportunities for capital growth, but investing off the plan also means you’ll be able to secure the property during the construction phase and pay the remainder of the price when the completion date arrives. By this time, however, it’s likely that you will have already made a considerable gain on your investment.
In comparison to completed property, buying off-plan property has many distinct differences. From the investment process itself to the opportunities for increased capital growth, many of these differences are advantages of buying off the plan. That said, this way of investing often invites some concerns, but for those who carry out their due diligence and opt for a reputable developer the risk of buying off-plan property is minimised. With this in mind, it’s no surprise that seasoned investors are turning to the off-plan market.