The appeal of off-plan properties to investors is easy. The promise of higher returns and the discount on price especially, are a big sell. For consideration, a property worth KES 10M with an annual rent of KES 720,000 at market rate. The rental yield on such a property would be 7.2%. In comparison, if the investor purchased the property at a price of KES 8.5M on off-plan basis, the rental yield would be 8.5%.
Among other gains, the off-plan investor would have saved about KES 127,000 per year compared to if he had purchased it outright on completion. In addition, if the property was 100% debt financed, the off-plan investor would clear the mortgage two years earlier assuming all rent was used to service the debt. But there’s a catch to it; the developer may not deliver in time, in fact going by the evidence the developer may not deliver at all, and that’s a problem.
The media has recently profiled details of investors who have lost money in off-plan schemes. It’s a familiar script, however it may not be within our reach to establish whether investors and or developers were victims of unforeseen circumstances or whether either party acted with untamed avarice. At any rate, the primary goal of investment is to prevent loss of capital.
With that here are a few words of caution to prevent an off-plan investment from throwing your finances off-balance.
It’s worth noting that most major developers now offer generous payment plans for their off-plan projects. In this, the price of the apartment is fixed on the date of signing a purchase agreement between an investor and a developer and can’t, or as it is, shouldn’t be changed later.
First the investor should make certain that the property is being sold has acquired the various approvals to proceed with the development. Since some developers begin to market the property without getting building approvals, this can be a source of major delays in case approvals are denied or take time. But approvals are not enough as even with approvals, actual delivery still hang’s in the balance.
One way to mitigate the risks posed by off-plan properties is to choose a developer specializing in this kind of property, and do a thorough background research on the developer. What projects have they completed in the past? Have any of their developments been delivered late? How many off-plan properties have they built? What have past investors said about them? How do you know?
You are better placed working with a reliable developer of proven track record, and of good repute in putting up similar types of property. In light of these, it is exceptional for an investor to get on board an off-plan vessel run by an amateur just starting out in real estate development. Unless the developer has experience in past projects or you are getting into a joint venture, that is a red line. Without clearing them off the hook though, even seasoned developers with a track record could eat your lunch.
Don’t be drawn by talk of rental guarantees and good returns, don’t get ahead of yourself. The information about returns and all the details that make for a good investment are secondary at this point. The focus should be whether the developer can certainly deliver the promise, how and when? Otherwise all the eye-opening investment details could turn out to be the rosiest of dreams, but nothing more if the developer defeats the deal.
In any event always remember to seek expert advice.