Off-plan: folly or fortune?

21 September 2006

Buying off-plan can be a boon for builders and investors, but there are risks. Jenny Knight weighs up the pros and cons

Buying off-plan means agreeing to buy a home while it is still a figment of the builder's imagination. Buyers hope for a bargain, while the builder reduces his risk by selling early - sometimes before a brick has been laid, but usually after building has started and about a year before completion.

Cunning marketing can wind buyers up to fever-pitch so that they behave as if they are at the January sales. Galliard Homes are masters of the art, often refusing to allow viewers on site until the last minute. Buyers dash in, reserve a flat and sign a contract on the spot, using one of a panel of laid-on independent solicitors.
Last month buyers camped out on the pavement for two days waiting for the moment when St James Homes opened the doors at Kingsway Square in Battersea, a Victorian conversion which teams period details with shiny new interiors.

The first flats won't be ready until winter 2007, yet nearly all buyers banged reservation fees of £2,000 down without even viewing, having pre-selected from website floor plans.
All 22 flats sold on the day. A further 11 will be released this weekend, but prices are on average nine per cent higher than on the first viewing. Studios are from £265,000 and three-bedroom flats from £475,000.

Cautious people think buying off-plan is reckless, but over the past few years investors have literally made fortunes.

Ibosa Oshodin, 42, a former British Rail booking clerk, has built up an empire of 100 properties through buying mainly off-plan. He sticks to well-known developers and buys in bulk, as he did with five one-bedroom flats at Capital East, Barratt's development in the Royal Docks, East London. The more you buy, the bigger the discount. "I started buying property in 1993 when new developments were relatively cheap," says Oshodin. "By the time I'd bought the third property I decided to buy off-plan. I was getting a 100 per cent return by the time the places were completed."

Earlier investments included Barratt's Virginia Quay in Leamouth, East London. "Properties there were the right price. I bought at £150,000, and the value rose to £210,000 almost immediately. If you are among the first people through the door of a promising development, and in a position to go ahead with a deal, you're onto a winner."

But Liam Bailey, head of research at Knight Frank, reckons good off-plan deals in London are getting scarce. "Prices have gone up by 20 per cent in London this year and are starting to slow because that rate of growth is unsustainable. In the north, where the market is a bit sticky, off-plan buyers can get good discounts, but not in London."

It used to be only investors who bought next year's properties at this year's prices - enjoying all the price increase while only putting down 10 per cent of the ultimate cost. Now shortage of properties is forcing owner-occupiers to join in. Ed Lewis, of Savills, says: "We are selling 53 flats in Lancelot Place, almost opposite Harrods, for £1million upwards. The scheme won't be launched until next month and won't be ready until next summer, but we have quietly sold half off-plan to owner-occupiers and overseas buyers already because people know you don't get excellent properties in prime locations coming up very often."

Even retirement developments now sell off-plan. The upmarket English Courtyard sells nearly a half of its developments off-plan. Buyers pay a deposit of £1,000 and have around two months to exchange contracts. Kevin Holland says: "There has been a sea change with older buyers, who now realise if they wait until the development is finished there is a good chance that the home they want will already have been sold."

Tony McKay, of Inside Track Group, the specialist off-plan property broker, says: "The largest discounts depend on buying power. Our members invested £550million in 2005, buying five per cent of all new flats that year.

"New-build apartments are tricky to value. In regeneration areas there may be no similar properties for comparison, so it's easy for a developer to offer a so-called discount. If you can't be sure of genuine value and a genuine discount, you have to walk away."

Buying off-plan

Do

• Get a solicitor to check there is insurance to make sure the development is completed if the builder goes broke.
• Buy from reputable builders because off-plan buyers take everything on trust from the build quality to the view.

Don't

• Forget if the market crashes, you still have to pay the agreed price.
• Assume you are getting a good deal. Check on prices per square foot and compare that with local prices.
• Think you can 'flip the contract' by selling on before completing. Most developers now add clauses forcing buyers to complete.

Source - Jenny Knight, Telegraph