FAQ 60 Is buying off the plan a good investment?
In a strongly rising market it may be possible to benefit from buying \”Off the Plan\”
There are a few issues to consider when looking at these types of properties.
Potential Growth
The key word here is \’Potential\’. Growth is governed by market forces – mainly SUPPLY and DEMAND. Simply put when supply increases to fill demand then the market
will force down the price. Large developments can suffer from this phenomenon. The developer will set the price for the property then go on to flood the market with more
properties. Properties at the end of a development are often difficult to clear because those who bought in the early stages are trying to sell before completion (bank values not meeting expected value).
The developers often offer cash back incentives to these latter investors. These incentives do not appear in statistics – the price remains the same to the outside world. Guess who pays for these incentives?
Guaranteed Rents
It is common to see rent guarantees offered by developers. These help to allay fears about letting when the property is settled. Examining this it is easy to see that the open market would easily rent at say around 4% gross rental yield and the if the developer offers 7% rent guarantee then in effect he is merely subsidizing the rent to the tune of 3%. This subsidy is likely added back into the price that you pay.
Sunset Clauses
The contract that you sign may have one of these included. This will need to be checked very carefully. What does a sunset clause mean? It basically means that the developer has the right to withdraw the property and re market at a higher price should he decide. There have been examples of this occurring when the market has risen sharply and the developer has decided to cash in on this.
Manufactured Growth
This style of property offers no opportunity to manufacture growth. The only available growth opportunity is through what the market decides will be the value. The investor has NO CONTROL.
Valuations and Settlement
There are many examples where the valuation done just before settlement has failed to meet a level where the investor can continue. At worst the investor is left having to provide a larger deposit on a property not worth as much as originally planned for. This backwards step means that any future growth ( natural growth) has to backfill these before making any real gains.
Wholesale vs Retail
An investor should be endevouring to buy at wholesale values, add value and then draw down on this value to continue. A retail property does not lend itself to adding value.
A developer has a huge marketing team behind them and of course greater risk. These have to be paid for by someone – guess who?
