Is off-plan property a better option for costly investment to some level?

BY Collins Kowuor

Do the constructions in phases to sync with the installment payments upon stage valuation Differentiate discount rates in line with stage of development?

Last week started on a positive note for the property market. It was reported that Central Bank might cut benchmark-lending rate to stimulate the economy. This would be godsend for the property sector, which has been burdened by high cost of borrowing. But the report made me think of one way of beating high cost of borrowing off-plan properties (pre-construction properties).

 Some may call them paper properties. But what are they? Look at it this way; a property developer has land to develop but the development requires a pretty sum of money to fund. The developer has less money and thus has to borrow from financiers to complete the development. Sadly, the cost of finance is too high to be absorbed in the price of the finished units without missing the target market.

What should the developer do? Simple, prepare a concept of your development with really nice documentation which includes 3D drawings with site, floor and unit plans.

 Add detailed information on financing terms, projected rentals, and so on. Upon approval of the plans by the approving authority, offer them to be developed units for sale at a reasonable discount with installment payments.

This provides you with funds to start construction of the units. The types of properties that can be developed using this approach are limitless, apartments, offices suites, warehouses, hotels just to mention a few.

Do the constructions in phases to sync with the installment payments upon stage valuation. You may differentiate discount rates in line with stage of the development.

The nearer the development is to completion, the less the discount given and the more expensive the units become. This makes some sense! Yes, because when the development nears completion, there is less risk that the developer can be illiquid.

If you are confident in your development, based on projections, you may assure the buyers a certain level of occupancy and rental income. You may also offer buy-back plans where, after a certain number of years, you buy back the property.

So much for the developer, what is in it for the buyer? A number of benefits, you don’t need to pay the full purchase price in one go. This definitely reduces your pecuniary risk, as one does not need to commit the full amount before seeing the completed house.

The discounts offered are usually quite decent which makes appreciation of value of your property more real and tangible. You want to be able to sell the property a few or several years later (if you so wish) at a decent margin.

The fact that payments are done by reasonable installments also helps you to plan well in terms of your cash flow. Don’t doubt that property is the place to invest in if you want to get a guaranteed real return on your investment especially when you factor in inflation.

However, as with all investments, you need to be willing to take some risk if you want a good reward. The crux of the matter is to minimise risk by thoroughly and properly researching the property investment. You need to consider four keys if going for off-plan property. The developer: You must get as much information as possible about the developer. How long have they been in business? How many developments have they successfully completed? How good is their reputation?

Are they in key markets with access to great locations? What is there financial situation? Property type: This will depend on your own needs and goals. Are you for investment or home or hybrid property? Do you prefer stand alone or gated community? Don’t forget to carefully look at the size, position and layout of the unit. Consider the quality and quantity of the amenities.

Location: This is a very important consideration, as it will affect future value of the unit and area around the development. Is the necessary infrastructure such as utilities and roads in place?

 How close are the important services such as hospitals, schools and shopping centre? You need to still ask yourself what other factors might drive demand for units in such location in the next few years, as this will have effect on rentals and the rate at which your unit will appreciate in value.

The writer is the Chairman of Institution of Surveyors of Kenya