There is a tremendous amount of off plan selling going on, mostly these properties are being offloaded overseas, in Asia and India. Recently I heard from the grapevine that flats in North Row, Mayfair are being sold for £3,200 per sq ft which is a ridiculous price given the street. ‘Comparables’ in Grosvenor Square were used to sell this; this is like using the price of mangoes to sell apples. Though Grosvenor Square is close in locality it is a very different location. North Row is used as a taxi shortcut whereas Grosvenor Square has a totally different prestige to it. Many of the embassies are located here, including the Indonesian Embassy and previously the American one too; and it’s facing one of the few green spaces in Mayfair.
These properties are being sold to Indians by a prominent Agent. It seems the foreign buyers are lapping up these off plan properties without much thought or investigation. They are suckers for labels and the prestige of owning something in the primmest area of London.
The off plans sales are going so well many of the agents are hardly interested in selling to London buyers. Even on bulk purchases the discounts are very marginal, typically 3% – 5%. There used to be a time when the standard discount for bulk purchases were 15% to 25%. These discounts could have been used as a deposit so in effect you didn’t have to put any money into the deal, on the contrary you sometimes even got a cash back. I remember I was offered 10 Flats in West End Quay Paddington in 2002 for £275,000 but the actual valuation was for £350,000 (which meant the mortgage would be on this amount), they even came with two year rentals to a company. The difference could be used to pay for the deposit and stamp duty. I made the wrong call as these same flats are worth £650k plus today.
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There exist both risks and rewards for off plan purchases. The main reward being you benefit from the price rise of the WHOLE property value with only 10% or 20% invested. Meaning if you buy a flat of f plan for £1m you only need £100,000 sometimes £200,000. If the price rises 10% you double your investment.
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In the above example it seems the market will need to rise heavily just to catch up on the investment level.
There is a down side to investing this way too, if the market turns you will be locked into a rate which is higher than the market rate. Many people are under the illusion that if the property drops more than 10% you can simply walk away from the investment, and let the developer keep your deposit. Make no mistake this is not the case and there are court cases to prove this point. Post credit crunch when property prices plummeted, there was a well-known case where investors who thought they could walk away from their deposits and forget about the deal were taken to court by the developer and were forced to honour their contract.
If invested in properly, with thought, off plan can be great purely because of the low investment and the long completion periods, but it can be a double edged sword as well.
There are threats looming over the horizon… One is the mansion tax which the government may be looking to implement. To what degree this will scare off foreign buyers is questionable however, many thought the rise in stamp duty would deter buyers, it had almost no effect. Many thought the reduction in housing benefit for Westminster would result in reductions in price for Ex Council BTL properties, again no effect, the prices have continued to weather the storm and rise. This is testimony to the strength of the London market. I feel when you look at the types of investors purchasing in this market, it is difficult to see how a rise of 10% to 20% per annum will excite them. The kind of business these buyers run make these returns look like chicken feed. Clearly the primary purpose for the investment is not to make money but to keep some of their funds outside their respective countries, so there is a safety net. The transparency of the UK legal system and its openness in allowing foreigners to purchase here are two of the main reasons why money flows into the property market here.
There is a difference in the price sectors, the higher you go up in price the more sensitive the property becomes to a down turn. The £1m – £2million level is the bread and butter range in Central London, where regardless of the market condition there will always exist a fundamental need at this level.
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In contrast when you purchase a property which exists today, it is a different type of investment, you are not speculating on the future. You can ascertain the market value right now, and if you are coming in below market rate you gain the benefit right away. If you come in much cheaper than market level you can resell prior to completion, as One of our investors did only last week. They were bold enough to play with their retirement money and invested in a flat blind, on our say so alone, for £700k; the flat was resold promptly just two weeks later for £910k. We had only exchanged, meaning only £70k was used in the deal, leaving them with a healthy profit and an appetite for doing more.
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Trying this kind of transaction on an off plan purchase, and the likelihood of similar success, would be more difficult as you will be selling a piece of space, without the help of the agent and marketing involved in the original sale this may not be an easy thing to do.
With off plan you also run the risk of the developer running into financial issues and not completing the development as was the scene post credit crunch. A lot depends on the completion period, if the period is too far off into the future the risk becomes higher.
In summary off plans can be good investments – as long as the prices keeps rising! If you want to see the margin today then better to deal with property which exists today and not in the future.
The Real Deal
Two four bed flats in Church Estate, London, NW8
Purchase Price: £425k each
- Bright four bedroom flats on the second floor of this four storey block
- Very good rental investment with good capital growth
- Long lease
- Low service charge
- Approx 900 sq ft area
- We believe the properties are worth £500k each right now
Call us now to secure this deal!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
Buying and selling large projects will give you higher returns than a normal buy to let. But before you get involved in such projects, do your research. Like any other business venture, trading requires not just money, but time and skill too. So it’s better to team up with people who are on the ground.
People are often surprised with how much property they can purchase; £100,000 can buy you £400,000 of property, this is through the principle of gearing. You make money by using someone else’s money.
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