Off plan property overseas — property that is purchased from the plans of a new development, which are sold from before even the first foundation has been dug — has the potential to be one of the most lucrative investments a person can make.
Unfortunately it also carries a certain amount of risk and this has come to the forefront over the past 6 months to a year, because of all the cancelled and postponed developments around the world as sales plummeted because of the credit crunch sparked by the collapse of the American banking system and property markets.
The biggest example of this was obviously in Dubai, a country being built almost completely from scratch. Many of us could see problems in its future, it was being marketed on the strength of its potential for capital growth, foreign investors were buying and selling to more foreign investors for a massive profit months later.
Times were good and developers were building new developments based on the money they would make from off plan sales on previous developments that weren’t completed. Anyone who did even a cursory amount of research could see oversupply looming. However, eventually it was the disappearance of the speculative foreign investor that led to sales dying off completely leaving the developers in real trouble and unable to finish developments.
Dubai was a special case if you like, because it was fuelled entirely by foreigners, there was no internal demand, and because of the sheer volume and prestige of the development, but still, people lost their money because they invested without doing the proper research. Below are 10 things you should make sure you do, and know before investing in an off plan property overseas.
1. Go to the Country and Check out the Developer
Ideally you want a developer who has completed developments under his belt. This might not seem fair, I mean how is a new developer supposed to get started? Simple, they sell their first few developments after completion, selling off plan is something that relies on gaining people’s trust and having completed developments under their belt is about the best way to do this.
Also, they should not be financing the building of the development you plan on buying into, using the funds from units sold off plan. This is what caused the problem in Dubai, it is the highest form of speculation, and you should never buy unless the developer has finance in place to build the entire development without a single off plan sale.
2. While You’re there, Check out the Development
You want to check that the developer has complete ownership of the land, and that there is no chance whatsoever that this will be disputed in future.
You want to make sure that the developer has secured the proper planning permission for the planned development. You may want to make subsequent trips to make sure that the plans are being stuck to as this can also cause problems.
Also make sure to have a full and frank discussion about the standards on completion. According to Louise Reynolds of Property Venture, finish standards vary from country to country, she said: “Build finish standards can differ. In Poland apartments are usually finished to ‘black standard’, which means the building is plastered, but not supplied with flooring, kitchen or bathroom. This is similar in Bulgaria too, where builders finish to ‘Bulgarian Standard’, especially in the capital, Sofia. If people are unaware they might think they are getting a bargain price but not realise that they may have to pay more for a kitchen etc.”
3. While You’re there, Speak to as Many People as You Can
Speak to the locals in the area the development is in. Find out things like: how long the season is, and what the area is like off-season. Vanessa Warwick of 4Walls warns:
“Some towns are very seasonal and are absolutely dead six months of the year to the extent of shops being boarded up. Many unsuspecting people have bought properties [in such places] without realising this and have been badly stung as a result. Even if they wanted to use the property themselves in the “down” period, they would not be able to buy a pint of milk without driving a long way! Often the beaches are also closed and not cleaned during this period.”
Also, if you can speak to some residents or investors in the developer’s previous completed developments to find out about the management, or the developer’s after care etc. Ask the developer to set up a meeting if possible, and if he acts cagey listen to the alarm bells.
4. Find Out How Many Investors are in the Block or Development
It should not be more than 30%, otherwise you will all be fighting/competing for tenants, warns Vanessa Warwick of 4Walls.
5. How Long Between the Finishing of the First Phase and the Last Phase
“Will the site be a construction site or can the site be divided so people moving in during the early phase do not have to share the space with construction workers, equipment, etc,” questions to ask says John Corey of Chelsea Private Equity.
6. How Long Before Any External Infrastructure Comes on Line, What if it is Late
“The London Jubilee Line was delivered years late compared to the promise made to the developer of the Docklands. Early commercial and residential tenants had to deal with a major site that did not have the Tube,” comes a warning from John Corey.
7. Is Any Part of the Development Work being Outsourced, and Who to
If some part of the construction work is being outsourced it is also prudent to do some checking into the firm the work is being outsourced to.
John Corey said: On one project I bought into the developer had outsourced the steel frame construction as the developer did not have that as an in-house speciality in the NW. Barrett was the developer and the sub-contracted company went under. The project was delayed for 9 months while they found another company to build the frame.
8. Make Sure Contact Has Been Made With the Electrical and Water Suppliers and that the Development can be Connected with Both.
John Corey has also had a bad experience with this, he said: Same project as above. The developer did not apply for electrical power early enough. It turned out that the site could not be supplied so changes had to be made to the planned heating system.
9. Be Careful About the Adjoining Properties and What the Other Owners Might do With their Sites
“An office building next to a development has been changed into an extended stay hotel. While that does not bother me it does impact some of the people who purchased off plan. More a matter or taste than actual nuisance,” warned John Corey.
10. Finally, all of Those Steps Above are for Researching a Development, but a Development Should Only be Chosen After You Have Done Significant Research into the Country, and Then the Region, and Then the Locality as mentioned in tip 3.
Vanessa Warwick listed the questions you should research answers to long before choosing a development.
For the country:
- Is the country politically and economically stable?
- Does it have a stable currency?
- Is there a lot of crime and corruption in the country?
- Is English widely spoken?
- How does the legal system operate in terms of property ownership?
- Is the country reliant on only one market like tourism or does it have other industries that generate wealth?
- Does the country have historic precedence of robust and stable house prices?
- What mortgage products are available and in what currency?
For the region:
- Is the region easy to get to in terms of regularity of flights, cost of flights, flight times etc?
- How does the local legal system operate in terms of property ownership?
- Is the region reliant on only one market like tourism or does it have other industries that generate wealth?
- Does the region have historic precedence of robust and stable house prices?
- How much development is going on, is there any danger of over-supply?
- What laws are there to prevent over-development?
Photo credits: by cristianocani via flickr