Off-plan or presale refers to properties available for purchase prior to them being move-in ready. It refers to projects just initiated with 100% land purchased and project plans, designs and necessary approvals from DLD and RERA in place (along with 20% bank guarantee or 20% project value deposited in escrow), or at-least 20% of the construction is already under progress. The same properties could be referred to as ‘new’, ‘ready to move-in’ or ‘ready for possession’ once the construction is fully completed and the condition is ‘ready to live in’. So off-plan or presale plans could be offered on approved properties just launched as well as those in the early stages of construction, as detailed above.
Globally, there are many markets which offer off-plan or presale properties. Home buyers and property investors like to purchase property in this way, and with careful assessment of the pros, cons, legalities involved, present and future market conditions, they stand to make significant capital gains. It is also important that for off-plan property to be attractive, there must be a supporting infrastructure in the vicinity, such as educational institutions, road or rail connectivity, markets, entertainment zones, healthcare facilities, financial centres, etc. either already built or due to be built within the next few years for the property value to appreciate.
Appreciation usually occurs because as well as the complementary infrastructure, developers who sell property off-plan might also offer financial incentives to early buyers. These could come in the form of a discount or flexible payment schedule. In addition, there may be ample opportunity for capital growth in a rising market and with a typical development cycle of 12 to 36 months. Dubai’s top-notch infrastructure, present and upcoming government projects, globally attractive price points and softened market conditions, make buying off-plan properties a very affordable and attractive option. Listed below are various factors to be considered while investing in off-plan properties.
Early selection opportunities are available in plenty when purchasing off-plan properties. Since a development will be in its early stages, you can be spoilt for choice with respect to various preferences, like floor levels, home style (corner home, south facing, etc.), parking slot availability, etc. Some developers, as part of early bird offers, may also accommodate requests for modifications like internal design changes, choice of colour schemes and/or various options for flooring to attract early buyers.
Locked-in price allows buyers to fix or lock the price according to area (in square feet or metres) negotiated with the developer. While buyers certainly may deal directly with developers, usually property consultants representing the buyer’s interest would be able to negotiate extremely attractive off-plan property prices for interesting properties as part of transaction advisory services, which could include scoops on hot property micro-markets, site inspections for property short listing, information on current sale rates across properties and micro-markets, legal advisor references, documentation, etc. Locked-in prices protect buyers from future price increases as the construction progresses, which usually is the case. You also get to enjoy the incremented return on investment as a unique advantage of investing in off-plan properties.
Early bird offers and other promotions can be very diverse, including gift hampers, gold, electronics, automobiles, holidays, home furnishings and interior designing. At times, there may be a fixed discount on the per square area price, over and above the off-plan sale or presale prices, as part of a soft launch or pre-launch process, prior to off-plans. However, these may only be available at most for just a day or two, and be mostly for previous clients, by invitation only, or through a recommended network of property consultants. Select developers may also offer capital guarantees where the developer pays the difference to the buyers in case of price drops within specific tenure resulting in devaluation of properties, money back schemes like assured percentage of returns or rental yields, or bundled offers like huge discounts on bulk purchases and lighter up-front percentages, etc.
Attractive payment schemes like Construction Linked Payment (CLP): Off-plan buyers have to pay around 5-30% of the purchase price within a specified period (e.g. 30, 60, 90 days) from booking and the balance in instalments on completion of different construction milestones. Buyers opt for this scheme if the project is in its initial stages or if they want to evenly pay in tranches over a period of time as and when construction reaches a milestone. This scheme also gives them enough time to mobilise their finances in small convenient portions, or if one does not have ready cash in hand. It is advisable to assess ones financial standing and eligibility when opting for this scheme with the assistance of a financial advisor.
Delayed mortgage payment with respect to off-plan sales will work best for you if you are planning to build up your finances over a few years to work towards your final payment. Not having to start your mortgage payments right away also allows flexibility if you need to sell your existing home or hunt around for the best financing.
With an Under Possession Linked Payment (PLP) Plan, one can pay up to 40% upfront, depending on the stage of construction, and the 60% balance in full on possession only.
While these methods are the two traditional payment schemes attached to off-plan sales, recent market conditions have prompted developers to offer minimal upfront payment (5 to 20%) during registration and the balance payable in parts on completion, possession and post possession, with the latter payment spread over a period of time.
Mitigating risks is a very important aspect of property transactions and successful property investors understand its importance. Purchasing properties that offer an on-completion payment or on-possession payment scheme ensures that the majority of the risk is borne by the developer. Therefore, developers are more dedicated to completing the project diligently and within a sufficient time frame in order to successfully complete the project and conclude sale transactions.
Legal reinforcements by local government bodies significantly impact off-plan investments. In Dubai, in order to ensure that the off-plan project is completed, the Real Estate Regulatory Authority (RERA) has introduced measures such as the developer having to pay 100 per cent for the land and making a down payment of 20 per cent as bank guarantee, or deposit 20 per cent in an escrow account, or complete 20 per cent construction before selling off-plan. Apart from the above measures, RERA even asks contractors to submit a 10 per cent performance guarantee.
Buyers don’t see what they may actually get even though you begin paying for the property well in advance. If visualizing a floor plan is difficult for you, then not being able to tour the exact new home will give you uncertainty regarding the final layout, colour scheme, size, and views. However, you do get a feel of what the final property might (almost) look like from a model or show house, and this can come as a relief – to some extent. You will also not have a chance to experience the finished building and how the architecture, landscaping and amenities work together to create a new and liveable community in plain sight. However, these days advanced technology allows you to pretty much experience this through an audio visual walk through.
You cannot enjoy your investment immediately – while finding your new home is exciting, it would be even more exciting if you can enjoy it the very next day. This advantage is very beneficial for growing families who need more space, or downsizers who require immediate one level living. Moreover, moving into newly completed communities with retail stores and other amenities gives you the benefit of having immediate conveniences right on your doorstep. This may not be immediately possible with off-plan properties which take a minimum of approximately 24 to 36 months for completion.
Defects or short comings could be another issue with an off-plan property. The finished property may not meet the buyer’s original expectations, either due to subjective reasons or because of material defects.
A fall in prices due to market conditions before construction is completed may result in the financing entity reducing the value of the loan or even denying finance, particularly if the buyer is purchasing the property as an investment rather than as a home. The buyer may be contractually obliged to purchase the property at the original price and so must make up the short-fall from other sources, or risk being sued if the buyer pulls out and the promoter sells the property at a lower price.
Developer going out of business before construction of the property is completed is another risk factor to consider and the buyer may not be able to recover the monies advanced.
A few other things to check for while investing in off-plan properties are the micro-market’s potential, developer’s track record, documentation (land title deed, escrow account number, DLD approvals, agreement with the contractor), construction and linked payment schedules, force majeure or termination and dispute resolution clauses. After conducting due diligence and deciding to proceed with the purchase, the buyer will need to carefully review and execute documents, including a reservation contract and a sale and purchase agreement (SPA), a short-form contract executed at the time of booking the property (note that the reservation contract may also be signed between the buyer and the duly authorised broker of the developer). Needless to say, every buyer must always insist on a stamped receipt of any payment made under the reservation contract.
Photo source: Damac Lagoons Portofino