“The off-plan property market refers to purchasing property before it’s been constructed or completed. Developers often promote this strategy because it allows them to secure funding for construction. Buyers benefit by typically paying lower prices compared to completed properties, as developers offer incentives like payment plans spread over the construction period. Additionally, buyers can often sell the property before completion, usually with a profit, as property values may appreciate during construction. It also offers flexibility in payment, as buyers can pay in instalments without interest. Hence, many developers push off-plan sales,” says Diana Nilipovscaia, CEO at MERED.
Is it a good idea to invest in off-plan properties?
According to experts, investing in off-plan properties can be a smart move if approached carefully. Some advantages include the opportunity for increased property value as construction progresses, flexibility in payment options, and the chance to sell the property before completion if needed. It’s crucial to check the developer’s track-record, the quality of their past projects, expected completion dates, and the current market conditions before deciding.
“The primary benefit in purchasing off-plan properties is for investors to enjoy a discount to market. Traditionally developers offered sales prices at a discount to the market rate for the equivalent ready property, in exchange for investors tying up capital for the duration of the construction process. This discount to market has softened recently as payment plans became more generous, and with the advent of post-handover payment plans. As such, investing in off-plan properties is a good idea for investors looking to reap the benefits of discounted properties provided they do not need the capital invested to pay returns during the construction process,” explains Peter Smithson, Sales Director, Belleview.
Don’t throw caution to the wind
When deciding whether to invest in an off-plan property, it is important to consider the net present value. This means comparing the discount to the market at a future date with the rental yield and potential capital appreciation in the present. Investors should calculate their potential rental earnings from the present until the property’s handover, and compare it with the projected appreciation of the off-plan property at handover. This analysis will help investors determine which option is more valuable in the long run.
According to Smithson, the top six questions that buyers/investors should ask themselves before investing in an off-plan property are:
- How does this off-plan purchase fit into my larger investment strategy/ portfolio composition?
- What discount to market are the developers offering and is the payment plan attractive enough to offset parking my money for an extended period?
- Does the developer have a track record of delivering properties in line with the quality they say they will deliver?
- Does the developer have a track record of completing projects on time?
- How does the location of the off-plan project fit in with Dubai’s big picture/ i.e., is it a good location?
- What are the risks, particularly concerning payment plan affordability and possible construction delays?
Financing off-plan properties in Dubai can be more complex than ready properties as banks and financial institutions have stricter lending criteria due to the risks involved. Higher down payments and additional requirements may be needed to secure financing. While developers provide detailed plans, there is still uncertainty about the final product as changes in design, layout, or materials may occur during construction. This may not align with the investor’s initial expectations. “Hence, consider the current economic situation, regulations, and any external factors that may impact the property market. Seek the opinion of trusted brokers who have experience with off-plan properties, and look into the developer’s reputation for customer service and post-deal support,” explains Nilipovscaia.
The wrap-up
The growth of the off-plan property market depends on various factors, including market and economic conditions. While standard growth rates may range from 15-30% per year in some markets, it’s important to consider the specific conditions of the market in question.
“Dubai, for example, has seen significant growth due to its thriving economy, growing population, and government initiatives to attract foreign investment. According to recent findings by ValuStrat, high off-plan sales within established communities have taken up the majority of home sales during January 2024. This surge reflects the growing demand for off-plan properties in Dubai’s real estate market. Moreover, recent data from the Dubai Data and Statistics Establishment report reveals that real estate activities grew by 4% in 2024, creating opportunities for developers and investors alike to capitalise on the upward trend in the market and potentially reap rewards from their investments,” says Nilipovscaia.
“For savvy investors who take the time to select the best projects to invest in, the off-plan market will provide fantastic returns. There are however projects where the discount to market is either minimal or non-existent which, with the aggressive supply coming to the market, may find investors stuck in negative equity in a few years’ time. Ultimately, as with any investment, it comes down to getting the correct advice,” concludes Smithson.
For a detailed perspective on the property market, visit: Dubai - Real Estate Review Q4 2023
