Insight – should you consider off-plan property investment?

14 April 2021 | Investment

Value for money?

At the root of any investment is money, particularly how much you stand to make from your portfolio. In comparison to a completed property, investing in off-plan should offer more potential for bigger rates of return. Off-plan property is typically more affordable than completed property but has the opportunity to become more valuable during the construction process.

The time between investment and build completion is typically around two years, with the expectation for the local property market to grow during this time period. As a result, your property could undergo natural capital growth, and upon completion, be worth considerably more than your initial purchase price. Not only is this beneficial if you eventually decide to sell your property, but the likelihood of yielding a greater rental income is increased.

While you’ll be building returns during this period, they won’t be readily available. This is a key consideration for investors, especially those that are looking for immediate passive income. This key difference between off-plan property and traditional investments highlights the importance of maintaining a long-term strategy for maximising returns.

On the other hand, off-plan property delivers a brand-new apartment, and often the opportunity to customise different elements. As it’s in the process of being built, some developers will give investors the option of choosing specific designs and layouts, which isn’t possible with completed property.

The reassurance of a newly built and pristine apartment also means that all appliances will be up-to-date and of a high standard, increasing the appeal of the property and decreasing the likelihood of void periods.

Is it risky?

Like with any investment, off-plan property comes with certain risks. Whether you’re investing mid-build, or even pre-build, it is inevitably riskier than investing in a completed property, largely due to uncertainties surrounding completion. All this demonstrates, however, is the importance of carrying out research and due diligence before signing on the dotted line.

Researching your developer should be your first port of call – identifying trusted partners with the ability to streamline your off-plan investment and ensure a successful completion. Prospective investors should pay particular attention to the company’s track record, assessing previous build quality and exploring investment case studies.

If a developer has a consistent history of delivering high-quality off-plan property for multiple returning customers, the risk of adding this asset class to your portfolio is minimised.

Having the confidence that your off-plan property will complete is just one part to ensuring the success of your investment. Tenant demand upon completion is essential, which can also be identified by early research.

During the initial stages of your investment journey, focus on the future of different areas and less on its current success. Search for population projections over a 10-year period and future employment opportunities, as both of these considerations can translate into increased tenant demand.

A combination of emerging locations and off-plan buy-to-let property is often the key to a diverse and successful property portfolio. Emerging locations, such as Bracknell, provide a unique investment opportunity. The town is currently in the midst of its biggest transformation to date, with several regeneration schemes totalling over £770 million. Spanning the next 11 years, Bracknell is set to become a hub for employment, tourism and leisure.

With this investment translating into an inevitable influx in tenant demand, off-plan property developments, if pitched at the right pre-market price, should offer the potential for significant capital growth during construction. This means that while the current purchase price will likely be below market value, the regeneration of the town will drive both property and rental prices, with the competitive tenant demand to match.

As a result, buy-to-let off-plan property in Bracknell would be an investment into the town’s future prosperity, ensuring a successful long term property portfolio.

What are the benefits of off-plan property investment?

While value for money and the opportunity to maximise your returns are two obvious benefits of investing in off-plan property, having this asset class within your portfolio has several distinct advantages. As a result, we have seen an increasing number of investors choose this investment vehicle, with 48.9% of the sales at SevenCapital over the past two years being off-plan investments.

Off-plan property has the ability to diversify an investment portfolio, whether this is made up wholly of completed property or various other assets. By broadening your horizons and having a variety of different investments within a single portfolio, your dependence on one particular market is reduced, while the reliability of your assets increases tenfold.

Although the completion period prolongs the time between investing and yielding a passive income, this often allows for a much smoother, stress-free process. Investing in completed property will require you to have your buy-to-let mortgage in place immediately, along with all necessary paperwork, but with off-plan property, there’ll be years before your buy-to-let mortgage will be necessary. With the competitive landscape we currently find ourselves in, this also offers the potential for a wider range of available products that can be leveraged.

The mortgage market is not the only area that will have evolved, the overall property industry and economy will likely be in completely different positions. After the turbulence of 2020, forecasts for the next four years are suggesting a full economic rebound with more stable figures across the board. Not only is GDP expected to experience a 17.2% increase, but UK property prices are being forecasted to grow by 14.5% with rental change of +8.5%.

So, should you consider investing in off-plan property?

As always, this answer depends on your personal goals and aversion to risk. Every investment comes with its risks, even completed property, but considering every asset and asset class is essential to achieving a balanced portfolio.

As discussed in the latest SevenCapital guide, How to Make Money Out of Thin Air, the reassurance of using trusted partners, and the potential of this asset class, outweigh the perceived risks of off-plan property to ensure a healthy long-term investment.

*Andy Foote is a director at property investment and development firm SevenCapital and an established property investor himself

This post has originally been featured in Property Investor Today.