Off-plan property investment is buying a property still on the plan or at the design stage, meaning not yet constructed. The buyer pays for it in installments.
The developer sells an investor the design to a home before it is built, often at a discount. The developer then uses the upfront payment to complete the construction of the property, thus is able to secure financing for the project.
Why Off Plan?
The off-plan property is deemed attractive if there is a high level of infrastructure in the immediate area e.g a new university or express roads, either already built or due to be built within the next few years. In a rapidly rising real estate economics housing market, buying off-plan enables investors and homebuyers to buy a property at a lower price than if they wait for the construction of their chosen property to commence. In addition, buying off-plan may be the only way to get a property with a specific location or set of features as the choice may be limited once construction starts.
What are the risks?
Buying a property off-plan, whether to use it as a home or as an investment, incurs more risks than buying a property that has already been built.
The developer may go out of business before construction of the property is completed and the buyer may not be able to recover the monies advanced. This the plight of investors who paid huge sums of money to Banda Homes, Suraya Properties and now Lesedi Developers, whose stories have made headlines in the recent past. The investors complained of making payments but not seeing any considerable progress in the construction of their homes.
There have been suggestions to introduce regulations to strengthen the off-plan property purchase sector, that will weed out phony developers. In 2016, Dubai introduced a regulation that requires developers and brokers to get approval from Dubai’s Real Estate Regulatory Authority (RERA) before they advertise a property in the media. The new regulation was aimed at cracking down on fake property ads, protecting both buyers and genuine developers.
They further strengthened the property industry by introducing a regulation that requires a development to first attain 50 percent completion before they can begin off-plan sales.
In the absence of such regulations, would-be homeowners are expected to carry out due diligence before engaging the developers.
How to carry out due diligence when purchasing off-plan
- Check the track record of the property developer. This includes viewing past completed projects and speaking to former clients. Evaluate the developer’s record of delivering projects within the stipulated time. You can go a step further and look at the project team i.e from the architects to the main contractor. Check on their certification e.g contractor should be registered under the National Construction Authority (NCA), architects under the Board of Registration of Architects and Quantity Surveyors (BORAQs), etc
- Always visit the site prior to signing the contract and submitting any payments. You need to physically check and ensure that you are not buying into non-existent land. For those in the diaspora where the buyer is miles away then you can have a trusted family member or friend check out the site on your behalf.
- Ask for constant updates on the project plan and especially on major milestones such as groundbreaking, completion of foundation works, etc. This ensures that there is adequate measurable progress in the project. Any developer not willing to provide updates to their customers is a huge red flag.
- Insist that payments are made based on milestones achieved in the project. These are some of the clauses that should be included in the contract. You can engage a lawyer who is well versed in property matters as they are able to understand complex contracts that are heavily skewed towards the contractor’s side.
- Lastly, the investor can request that the new-build property developments are backed by bank guarantees that protect the buyer from a builder going bankrupt.