Reducing property investment risk to increase your profits
Off-plan property values could suffer as much as other property prices if the general market takes a tumble. If this happens, you could be left with an investment that is worth less than when you agreed to buy it. You may still have to settle. You could be left with difficulties in financing the off-plan property. If you can’t complete, and the developer sells to another investor, you could lose your deposit and be sued for the difference between your agreed purchase price and the lower sale price achieved.
Fortunately, property market downturns in the UK have been few and far between, and short-lived when they have happened. But they do happen. So how do beginner investors reduce the risk of a temporary market decline damaging their off-plan investment?
In this article, we discuss what causes property market weakness, and the steps you can take to limit the risks to your investment.
What is a market risk in off-plan property investment?
When you invest in off-plan property, you agree to buy an asset at today’s value for completion at an agreed date in the future.
Let’s say that you buy an off-plan property today, and the completion date is in three years. If property values rise before completion, you’ll have made an ‘instant’ capital gain. Financing the completion should be relatively easy because the property’s value is above the price you are paying.
However, if the property has fallen in value, the lender may not want to lend you the money to complete. You could be sitting on an investment that is worth less than you agreed to pay, and that you can’t finance.
Market downturns happen, and there is little you or I can do about them. They happen far more often on a local basis than a nationwide basis.
What causes property market downturns?
Several factors cause property values to fall. War is one of them, though more commonly it is the economy that pushes prices lower. When the economy falls into decline, people lose their jobs, and wages fall. It becomes more difficult to secure mortgages, and people can’t afford to buy homes. Demand is sucked out of the system, and house prices fall.
This dynamic is seen most often in local economies, especially where one industry or major employer is dominant. When the coal industry folded in the UK, house prices in areas that were reliant on the jobs in the pits were decimated. Some still haven’t fully recovered.
If interest rates rise, mortgages become more expensive. Again, demand falls, and house prices follow.
So, the economy is the biggest factor in determining whether house prices rise or fall. But there are others, too. For example, if immigration suddenly stopped, there would be less demand for housing. And where previously promised infrastructure investment is cancelled, the effect on property prices is most likely to be negative.
If you can’t affect the market, how can you reduce your market risk?
It’s most unlikely that you have the power to affect the economy or property market (unless you’re the Governor of the Bank of England, or the Prime Minister, perhaps). But this doesn’t mean you can’t minimise market risks.
Here are five steps you can take to slash market risk when you invest in off-plan property in the UK:
1. Buy in the best places to invest in property UK
‘Location, location, location’. The three rules of property investment, according to most property gurus that enter our living rooms via the television set. The location isn’t the be-all and end-all of property investment, but it is mightily important. Properties in the best locations tend to fall less in price during a market downturn and recover faster afterwards.
Always invest in areas that benefit from strong property fundamentals which will sustain demand for housing today and in the future. When you research location, think shops, schools, transport links, major employers and major investment. Property research is your guarantee to success as a property investor.
2. Always buy from a good developer
Poor developers are the first to pull back on current development when the going gets tough. Therefore, we always research developers thoroughly, making sure they are financially fit and have a good track record of delivery. To slash developer risk when you buy off-plan property, consider factors like:
- Track record of delivering on time
- Any court actions or disciplinary notices
- The ability to make site visits
- The background of key directors
3. Obtain the largest discount possible
When you buy off-plan, you will buy at today’s value. The developer will be keen to make the sale. It wants to cover its initial costs, kickstart its financing, and provide evidence of confidence in the development for future financing needs. Understanding this, you could negotiate a sizeable discount on off-plan property by following these four keys:
- Invest as early as possible – the earlier the investment, the bigger the discount is likely to be.
- Buy off-plan property in bulk – there is always a discount for volume (this is one of the advantages we have over single investors).
- Be prepared to move quickly – have your people and finances ready to move.
- Buy off-plan property off-market – invest in off-plan before public offerings are made
4. Be prepared financially
Get all your ducks lined up. You’re buying in the best place to invest, you’ve done your due diligence work on the developer, and negotiated the best deal possible. Don’t neglect your finances:
- Ensure that you have enough cash to cover the deposit
- Use a mortgage broker to get you the best buy-to-let mortgage deal
- Save cash in a reserve fund
- Be prepared to consider other ways to make up a temporary shortfall because of a dip in the market
5. Invest with a shorter timeframe
Finally, if you are ultra-cautious, you might invest with a shorter period between deposit and completion. For example, most mortgage companies hold an offer open for six months. If your completion date is less than six months away, you shouldn’t have trouble financing with the pre-agreed mortgage.
The downside to this strategy, of course, is that you’ll be paying closer-to-market value when you pay your deposit. You’re unlikely to get much of a discount (if at all), and there is less time for property prices to rise and give you a profit on your investment.
Invest for maximum profit and minimum risk
Contact one of our team today on +44 (0)207 923 6100, and discover the power of our property research and Hotspots Algorithm. Our research team analyses 108 data points across 324 UK areas and compiles this into free property investment guides. These will help you put market risk behind you, and look forward to the rewards of investing in off-plan property.
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