Off Plan Explained
Why do Developers sell off-plan?
Property development is expensive so developers and their banks/financiers require some assurance that the units they are going to build will be sought-after by purchasers, be they residential investors, owner occupiers or 2nd home buyers seeking a home abroad. Selling a home off plan is one of the few ways of providing evidence and comfort to the bank that their investment is secure.
Selling early is therefore a hedge by the developer against any marketing correction or unforeseen market competition. Developers constantly assess commercial risk and will, wherever possible, try to remove uncertainty – even at the cost of a speculative profit. They may sell the units either individually or in bulk before any building works start on site. Many developers will offer market packages, or a variety of other benefits, to the early buyers to assist with the selling process. This may include assistance with the eventual re-sale, either during the construction stage or after physical completion. The developer may also offer some incentives to assist with the future investment by offering a long term rental guarantee or furniture pack, if the property is intended to be a held investment. A word of caution though, it is important to make sure your contract allows you to sell on your new investment at any time of your choosing as some developers may put restrictive clauses into their contracts. However, it is very important to remember when making a commitment to an off plan purchase you are exchanging a contract for a property acquisition and therefore, if there is a market correction, you are still liable to acquire the property at completion at the contract price.
Why do Investors buy off-plan?
As we said earlier, developers are making a hedge against any market corrections while investors are making a call that the market will rise. It is a fact that since Dubai’s allowed foreigners to purchase Freehold property any residential property investor who has taken a medium to long term view has made a sound investment, subject to the inevitable peaks and troughs that always appear.
In Dubai this trend has been even more dramatic. As a general rule the earlier in the process an investor commits, the lower the price is fixed and the longer time-frame they have to see their property inflate in value. This benefit can be increased if purchased in bulk but this advantage must not be regarded as ’buying discounted properties’ or ’bargain deals’. Whilst we acknowledge there are some distressed sellers in any market, the opportunity to buy a property with a genuine discount of more than say 5% are very few and far between and difficult to secure. Watch out for sellers who inflate the asking price to enable a discount to be given. The process should involve working with the developer to acquire a property at a competitive price which, if coupled with a package of other benefits such as sell-on assistance or rental guarantees, should provide a maximum return on the investment.
How Do I Form An Off Plan Investment Strategy?
There is no easy answer to this question, largely it is a matter of personal choice. For example, you may decide to purchase three properties on the outskirts of Dubai rather than one in Downtown or Marina or you may decide only to purchase one bedroom flats, penthouse apartments or family homes.
Ultimately your budget will be one of the biggest influences, although you must also consider your exit strategy. Some of the issues to consider may also include, the length of time you plan to hold your investment and the cost of holding your properties . In outline some of the strategies you may wish to consider are:-
Buy to Sell (Flip)
In this scenario you pay your deposit and exchange contracts then, during the construction phase, sell your contract on to a third party before physical completion. In this instance you have only paid a deposit and some construction linked instalments. At the point of the resale to the new purchaser, you in turn retain your purchaser’s deposit along with the difference between your contract price and the new agreed price. Your purchaser can then inherit your contract, with all its obligations, and will ultimately complete the purchase with the developer.
Buy to Hold (Let)
Here you proceed to purchase in the normal way but at completion let the property and collect the rental income from which you pay all your outgoings and retain any profits. This is by far the most popular strategy for investors.
Consortium or Fund Purchase
In this case you join a group of investors, putting in a percentage of the purchase price which may or may not subsequently involve the consortium borrowing money to leverage any price differentials. The fund is managed from income received and any dividends distributed on a pro-rata basis.
What Off Plan Property To Buy?
In the same way as deciding what to purchase, where to buy has to be a matter of personal choice. Your budget, to a large extent, will determine what and where you can purchase. However, in our opinion, there are three distinctive categories of properties which may be considered. These typical areas can be found in Dubai
This is an area which has been long established as a prime residential district, with a constant flow of property transactions and well documented price trends. The advantage here is that there should always be a ready market for either a re-sale or letting, however property price inflation will generally be restricted to the mood of the local market.
This is a development normally close to or within an established area where, for any number of reasons, the circumstances of the district are about to/are improving. Therefore the area will become more desirable and as a consequence, property price inflation should accelerate. Infrastructural improvements to any district are a certain trigger for increasing desirability for any area and will provide an extra element to accelerate potential price rises and therefore a greater profit for those speculators who get in early with an off plan.
Examples of circumstances in Dubai that can increase desirability and therefore value of an area are as follows:-
- New Road intersections
- New schools opening close by
- A Mall or Supermarket opening
- An iconic building
- Completion of the infrastructure and landscaping
- The development is nearing completion
- A new Hotel opening its doors
- A new Club House
Future Development Areas
Buyers of property in a district labelled as a future investment hotspot are making the greatest speculation. In these areas there are no immediate plans for infrastructure improvements and possibly the social amenities are at their poorest. The long term view has to be that the district will become an up-and-coming area before ultimately turning into an established area – in which case, the capital growth and values should be phenomenal.
Who Buys Off Plan?
Absolutely anybody who is concerned about a long term investment should consider purchasing a residential property as part of an investment strategy. However this must be undertaken with the full knowledge and understanding that:
- this has to be a long term commitment
- year-by-year price trends will change for the better or for the worse but overall history has shown positive growth should result
In reality off plan residential investors come from every sector of the community.
How to Buy Off Plan Property?
This will depend on your needs and financial abilities, however in our opinion, you should not consider buying any property off plan at the risk of putting your other interests at risk
To find the correct type of investment for you we advise taking advice from a reputable agent such as Elite Realty Dubai coupled with your financial advisors.
When To Buy Off Plan Property?
Forecasting any market is always a difficult judgement call and the purchase of an off plan property is no exception – ultimately there are no guarantees.
Most investors like to buy at a time when prices are perceived to be on the rise, or preferably when they are on a slow steady increase. Purchasers can then forecast the capital growth during the time they hold the property and plan a strategy rather than during a period of falling markets or very steep inflation. This is because any market that accelerates too quickly can crash without warning, is generally unsustainable and therefore unstable. It must be remembered that every location is different so market pressures and idiosyncrasies will influence the pricing of each and every property. It is beholden on the purchaser to undertake their own due diligence to satisfy themselves that the investment they are making meets their criteria and growth expectations. A good starting point for properties within Dubai should be to talk with one of the experienced Real Estate Agents at Elite Realty Dubai
How Do I Hold Off Plan Property Investment And When Do I Sell On?
If you are looking to buy to flip, then it must be remembered that most potential purchasers register at an estate agent’s office looking for a property they can occupy in the short to medium term and not something that is unavailable to move into for maybe a number of years. Therefore we advise placing a property on the market for re-sale approximately three quarters of the way through the build programme or at a time when it is possible for purchasers to walk into the property and see the aspect, size of rooms and general ambience of the completed scheme. You still may not achieve the full open market value but you will, if purchased wisely (subject to market conditions), make a good profit.
What are the advantages of buying off plan?
For the purchaser, the potential upside of buying properties off plan is considerable. By purchasing at the earliest opportunity, the time difference between initially securing the contract with a fixed price against the value at completion can be significant and this upside is your instant profit. Furthermore, by securing your unit(s) in the earliest phase, you are able to secure the style and type of property that matches your investment criteria and, in some instances, can influence the direction and specification of the finished property (ies). Looking at the pure financial implications of the transaction, you are paying a deposit and further instalments to purchase the property whilst enjoying the inflationary trends on 100% of the capital value.