Investing in property during the planning stages, before the building process has been completed, or in some cases, before it has even started, can be extremely lucrative for investors.
For investors who are new to the sector, it may seem like a daunting prospect to hand over cash before seeing the finished product, and like any investment it is not without its risks.
However, the benefits are numerous, including often securing a better price, and seeing greater capital appreciation on completion of the project as a result, being able to select the best unit in a development, and having the chance to personalise the property’s fixtures and fittings. Furthermore, many large new projects bring with them added investment into the surrounding area, which can add to the appeal of the property once it is complete.
Where to invest
City centres are booming at the moment as more workers, particularly young professionals, are opting for a shorter commute alongside living in the thick of the social scene. Manchester has seen a huge rise in the number of inhabitants coming to its city centre over the past year, but demand is also high in more secondary areas including Preston, Bolton and Reading, where price points are lower than their neighbouring major cities.
With any property purchase for investment, choosing an up and coming area is key to making the best returns over the long term. Areas that are set for future investment or major regeneration, or those that are about to see major improvements to their transport infrastructure – London’s upcoming Crossrail development being a key example – are often a safer bet than those that have already seen vast improvements over the past decade.
Working out returns
Before making any investment, but particularly in off-plan, working out your potential returns as well as affordability is vital. However, rather than looking at gross yield against gross purchase price, which can be misleading, Marcus Docker of mortgage broker Visionary Finance recommends taking all your costs into account – mortgage payments, ground rent, service charge, lettings management fees – in order to get a more accurate picture.
“You can get a better idea of what your net return will be after you deduct those real costs and what that is as a percentage to your cash investment,” he says. Developers should be able to offer a good prediction of expected rental income, and there are several resources out there that can help you predict potential capital growth prospects.
When to get a mortgage
When buying off-plan with a mortgage, it is important to speak to a mortgage broker at the outset to see what you can borrow. It can be slightly more complicated due to the fact that the mortgage will not be paid out until the development is completed, so you should stay in touch with the developer or agent throughout the process to keep up to date with projected completion dates. For overseas buyers, it is recommended that they speak to a mortgage broker as early as possible in the process as it can take longer for paperwork to go through.
Mortgage offers tend to be valid for six months, so Marcus Docker recommends that UK buyers look at securing their mortgage offer around three months before the expected project completion date. This gives some leeway if the project ends up running over.
Best property type
What type of off-plan property you choose will very much depend on your personal circumstances and investment style. From houses on the outskirts to city centre flats, different investments will attract different tenants, but the important thing is to try and choose a property that will attract high demand.
According to Matt Eastham of property management firm Easthams & Co, there has been a trend recently for young professionals looking for centrally located two-bedroom flats. This tenant demographic, often falling under the ‘Generation Rent’ label, is more inclined to want to share with friends in order to reduce overheads, freeing cash up to travel or socialise, according to Matt.
Equally, at property investment company BuyAssociation it is one-bedroom apartments that sell out the quickest, as they are a great investment option for those looking for a lower entry price, so it really depends on the investor and the location of investment.
Help to Buy
Off-plan investment isn’t just for seasoned property investors, with many developments available ideal for first-time buyers and owner-occupiers. There is a drive at the moment among off-plan developers to encourage buyers under the government’s Help To Buy scheme, which has recently been extended, and buyers are now able to remortgage using Help To Buy onto 35-year mortgages.
One of the benefits of using the equity loan scheme, which is only available on new-builds, is that you have greater purchasing power and can therefore afford to make a bigger investment than you would otherwise be able to. The loan moves with the value of the property, so if the value goes up by 20% then the amount you owe back to the government would increase by the same percentage, but it still works out cheaper, according to Marcus from Visionary Finance, than it would otherwise.
“If there is a chance that the property value does decrease, the equity loan that you’ve borrowed from the government also decreases,” says Marcus. It can therefore be a good way of hedging your risks during uncertain times.