Unpacking The Off Plan Real Estate Investing

By Cytonn Investments / Published January 17, 2022 | 10:24 am

KEY POINTS

Upon completion, the end buyer may decide whether to sell the unit on profits, move into the property, or rent out the property.

KEY TAKEAWAYS

Purchasing off-plan is a great way of investing in Real Estate which has continued to perform better than other asset classes such as the Equities market.

Off-plan investing is defined as the process through which an investor buys into a Real Estate development before it is completed.

The selling or buying of property is done before the property is built when there are only plans outlining the development concept alongside the relevant project approvals.

For off-plan sales, the payment terms always depend on the arrangement between the buyers and the sellers, and at times they can be done in installments as the project progresses.

Upon completion, the end buyer may decide whether to sell the unit on profits, move into the property, or rent out the property.

Developers on the other hand stand to gain from capital injection since off-plan investments have proven to be an effective mode of Real Estate financing.

The concept has continued to gain popularity in the Real Estate market over the years driven by:

Affordability: Units bought on an off-plan basis have proved to be affordable compared to the ones purchased upon completion. Real Estate investors may end up paying up to 30.0% to 50.0% less (depending on the project duration) for a house brought on an off-plan basis. In most cases, buyers are provided with house prices that are valued at a lower price compared to the available market prices so that they get attracted to the investments.
Capital Gains: Houses brought on off-plan have the potential of capital gains which are higher compared to appreciations that individuals get when they purchase a property on completion. For instance, an individual who purchased a 1-bedroom unit off-plan at Kshs 5.5 mn in Cytonn’s Alma in Ruaka, stands to gain 55.0% in price appreciation as the unit’s current selling price is Kshs 8.5 mn in Phase.

Buying a property that is yet to be developed or is in the pipeline poses greater risks to investors such as the risk of delays. It is therefore important for an investor to undertake various strategies to minimize future risks and losses resulting from uncertainties such as projects stalling.

Some of the important tips that need to be considered before making off-plan investments include:

Market Research: The buyer needs to conduct thorough market research and inspection of the preferred location of the development, in order to know the market performance of the area over time and in turn maximize future returns,
Developer Due Diligence: Buyers need to run a background check on the developer and consulting firm that is implementing the project prior to purchasing a property,
Project Due Diligence: Off-plan investors need to evaluate the viability of a project through:

1. Visiting the project site to ensure that it actually exists,
2. Evaluating the development titles to have proof that the owner of the land is genuine,
3. Evaluating the project plan approvals to understand if the developers have the legal rights to develop the properties and to prevent delays in project delivery,
4. Evaluating the project team, experience, history, and capability to gauge if they can deliver,
5. Conducting research on Comparables to gauge the possibility of earning potential returns as promised by the developer, and,
6. Understanding the project design team to understand the credibility of key individuals in the development process such as contractors and

Contracts Due Diligence: Before signing any agreement from the seller such as a sale agreement, it is advisable for the buyer to carefully read the terms and conditions in order to avoid risks of malpractices or compromise, and,
Financial Strategy: The buyer should have a financial plan as to how the property will be purchased, from the options that exist such as mortgages, installment plans, and, cash at hand among With the limited funding options in Kenya, the buyer can consult his or her bank for financial advice and position, to avoid financial losses.

Off-plan investments have proven to be beneficial to investors due to their affordability, flexible payment plans, high capital appreciations, and the ability to make design modifications.

Additionally, purchasing off-plan is a great way of investing in Real Estate which has continued to perform better than other asset classes such as the Equities market.

Developers also stand to gain since they are able to acquire alternative sources of financing from off-plan buyers. Plan investing continues to be a lucrative investment opportunity that provides the possibility of earning high returns which may go up to 30.0% to 50.0% p.a.

However, it is also important for investors to develop an understanding of what they are getting into, the terms of the contract, and the expected challenges they may face in the process. This can be further ensured by the buyer engaging a conveyance lawyer to certain the effectiveness and legality of the agreement to develop the project thus preventing fraudulent cases in the future.

For more information, please see our topical Off Plan Real Estate Investing