The pros and cons of buying property off-plan in Liverpool
Would you pay money for a car you’ve never been able to see let alone test drive? Or cough up cash for clothing with no guarantee it would actually be made? For most people the answer is probably no. Yet a huge number of people put their money into properties that have yet to come to fruition. They’re willing to invest in nothing more than a vision. And developers are keen to secure that investment, even before the builders are on site.
Words by Christine Toner
“Investing in a vision.”
A city like Liverpool, which is the focus of much investment and development, offers plenty of examples of properties which are being marketed long before they’re complete. But is this just an efficient approach to letting or selling properties? A chance for a developer to get ahead of the game? Or is it actually more important than that?
“From a cashflow perspective it is vitally important to secure early off-plan buyers, especially in the current environment where bank funding for ‘speculative’ schemes is very hard to come by,” explains Alan Bevan, managing director of agent City Residential. “It also gives the developer real comfort that what they are developing is in demand from buyers.”
The economic crash certainly had ramifications for development funding. Many high street banks all but exited the sector and the lack of available funding saw the rise of alternative lending platforms, as well as an increased need to secure early investment – something developer Elliot Lawless of Elliot Group is well aware of.
“Development funding used to come from a mix of the developer’s equity and bank funding, but the banks exited the market after the last crash and left a major gap,” says Elliot. “Many developers, particularly in the residential sector, sought alternative funding sources, notably from private individuals keen to invest in UK property as part of their pension planning. Seventy per cent of our off-plan sales are now to overseas buyers.”
Elliot says these investments are structured to give the firm working capital to progress with a scheme whilst protecting the interests of the investor.
“They have certainty, not least from our track record, whilst we are able to bring projects forward more quickly,” he explains. “Investors pay in stages as the build progresses and their funds are held in escrow by lawyers so they’re safe. How the cash is drawn down is carefully regulated and the process works very well.”
And it’s not just sales that are crucial for developers. Paul Nicholson is chief executive officer at Luxor Estates, which currently retains all of its properties and offers its developments for let only. However, Paul says it is imperative that he secures off-plan lets of the units to demonstrate the demand in the development in question and ensure that the generated income for the property is feasible.
“We are considering using off-plan sales on our future larger developments as it will greatly assist in the cost of the development but at the same time protect the buyer’s investment,” he adds.
While the benefits to the developer are clear to see though, one wonders what benefits there are for the buyer in purchasing a property before the development is complete.
“The ability to choose from a range of apartments, sometimes at a discount to the open market value,” says Alan.
“In a rising market, the buyer may also find themselves having ‘made a profit’ between the time they exchanged to the date of completions. Sometimes they may well be offered a choice of specification which will enable them to tailor their new home to their specific requirements.”
There is also, of course, the chance to secure an in-demand property before it’s too late.
“For developments which have received high levels of interest, allowing customers to reserve their property off-plan gives them the security of knowing their future home is secured,” says Paul. “For our renters, it also gives them a specific timeframe so they can prepare for the move.
We communicate with our off-plan renters throughout to keep them up to date with the building progress and move in dates.
“Another benefit of securing a home off-plan is the selection tenants get – they can handpick an apartment they would like in the development, depending on availability.”
“Buyers should look for developers who have performed to plan and to budget and should do their due diligence as they would with any other investment”
But it’s not all good news. Unfortunately there have been many examples across the UK and beyond of investors piling their money into a development that never actually gets built, usually because the developer runs into financial difficulty.
With a global economy that’s still shaky at best is it wise to take a punt on an unbuilt property? And, furthermore, what if the property that is built is not actually worth what you paid, given the transient nature of the housing market?
“One of the downsides of buying off-plan is the risk of the market falling rather than rising between exchange and completion,” says Alan. “There are also other risks such as the developer going bust, the finished scheme/product not being delivered to the expected or guaranteed level and being unable to obtain finance on the scheme at the expected level.
“The recent announcement by Nationwide confirming it will not lend on new schemes where the ground rent terms are overly onerous is a great example of this risk.”
One thing buyers should always do before investing in a property is undertake proper due diligence. Researching the developer should give you a clear idea of whether they are financially sound enough for your cash.
“For buyers the key consideration is the developer’s track record,” says Elliot. “They should look for developers who have performed to plan and to budget and should do their due diligence as they would with any other investment.
“We use a major firm of international lawyers to provide all the paperwork and this gives our investors considerable comfort, too, not to mention the full protection of the UK courts.”
Alan Bevan agrees.
“In an ideal world buyers should only deal with genuine, well known developers who have a track record of delivery over a number of years and have a strong reputation with existing customers,” he says. “This should negate most of the risks associated with off-plan purchases.
“On top of that they should also ensure that any deposit monies are held in escrow and cannot be used to fund the build of the scheme, and that there is a new build warranty that protects the deposit, not just the scheme, when finished.”
Most new build properties come with warranties from one of a number of approved organisations, though the vast majority come from the National House Building Council (NHBC). These warranties should offer you some financial protection.
The NHBC states: “The builder is responsible for completing the home to NHBC Standards. After exchange of contracts if, because of insolvency or fraud, your builder does not start or complete building your new home, we will reimburse your deposit or arrange for the home to be completed in line with the NHBC Standards. We will pay up to a maximum of 10% of the purchase price or £100,000, whichever is less.”
Investing in a development before work has even begun can help you to secure a bargain and be part of something from the very beginning but it’s not without its risks. As with any financial decision, the more research you do, the safer you’re likely to be.