Jamie Johnson, chief executive of FJP Investment
The UK’s enduring shortage of housing stock presents numerous challenges for investors and property developers. A shortage of developable land available on the market, along with the excessive red tape and lack of incentives for builders to develop permissioned land means there has been little progress in recent years on addressing a gaping issue within the housing market.
The fact is housebuilding levels continue to fall short of the government’s targets. Figures reveal that to address the backlog of demand and futureproof against anticipated housing needs, the UK will need to produce more than 300,000 new homes every year for the next decade. With social housing construction reaching worryingly low levels, the impetus for delivering new housing falls almost entirely on the private sector. Naturally, this means incentives, grants, subsidies, and careful persuasion are required to encourage investors and developers to the market – which against the backdrop of a post-pandemic recovery, presents added complexities to the issue.
Looking ahead, there are key areas of opportunity for the private sector to take a bigger role in bypassing these challenges and contributing towards a greater delivery of homes. Off-plan property investing for example, has the potential to offer key advantages to a wide range of stakeholders, while also contributing to tackling the under-supply of housing.
Accordingly, those looking to grow their portfolio would be wise to consider whether purchasing off-plan property may be a suitable investment. Research conducted by Hamptons revealed that in its 2016 peak, nearly 40% of new home completions were sold off-plan. By 2020, it was only one third (33%). While not as popular as its peak market share over the last decade, there are numerous circumstances which may lead this type of investment back to the fore.
In addition, this investment has its own innate advantages. For instance, investors can buy property within a development during construction, at a price which is likely to be substantively below its market value on completion, and then make a quick return on their investment. On the other hand, more ambitious developers may look to buy land with approved planning permission, but where completion of the build has halted, often for financial reasons, and take on the cost of development themselves, allowing them to side-step much of the bureaucracy that comes with the planning process.
The most attractive benefit of off-plan investment to most investors will be the potential to acquire a property at a rate which could be significantly below its future value on the housing market, or otherwise a favourable sunk cost for a high potential letting yield. When construction projects are delayed, and developers need to be creative in how they seek financing to complete the property or properties, opportunities can arise to get a good deal. The early bird may indeed get the biggest worm, when it comes to off-plan investing.
Another impressive element of this type of investment is the speed at which a return can be made. Across the property market, whether looking at residential, commercial, buy-to-let, efficiency is the currency which keeps the market moving – and growing. As such, the pace at which off-plan property can be flipped significantly enhances its investor appeal.
Ordinarily, property will be purchased at the market value of a development that has not yet been completed. Once the development can be completed with the funds of off-plan sales, investors can expect a higher price and a healthy return in the short-term.
For developers taking over projects with planning permission, there is a similarly attractive benefit – they can capitalise on a much faster completion than building from scratch. By cutting out the process of buying land, commissioning the design, and navigating the planning system, developers can gain access to a simpler and more cost-effective route towards achieving a complete and saleable property.
All things considered, investing off-plan can represent a diverse and highly beneficial investment opportunity, affording in many cases a significant reduction in the time to complete a build, while also reducing the financial resources required.
Navigating the risk factors
While investing off-plan can be an attractive prospect for investors and developers alike – it should also be noted that there are potential risks to be wary of, which may limit the value of this investment vehicle. Consider the case of bidding to resume construction on a halted development. Firstly, due diligence must be conducted to ascertain why construction was held back – there may be unseen costs such as expensive groundworks or challenging site access which could impact investor’s anticipated profits. New developers may also have to contend with the design whims and strategic planning of the original architect and developer, making this a reasonably inflexible form of investment.
Those looking to adjust the specifications on, for instance, a HMO (House of Multiple Occupancy) development to increase its potential letting yield, may in the best case scenario find their requested alterations waved through with little protest by local planning authorities. On the other hand, any necessary adjustments may also require beginning the planning process from scratch, which could result in costly delays.
It should also be considered that off-plan properties are, by nature, of limited stock. There are, at any given time, a finite number of properties of this type on the market and investors and developers increasingly favour property with pre-approved planning permission and a direct route to profitability.
Accordingly, as the stock reduces, the potential cost savings at the point of purchase may become less competitive relative to completed builds or developing from scratch. This area of the market must be viewed as elastic, and subject to rapid change, as it is somewhat reliant on the fortunes of the wider housing market.
As the UK property market continues to perform strongly, off-plan investing, at this moment in time, can represent an efficient and cost-effective way of bringing new housing stock to the market. That being said, as with all types of investments, getting the right financial guidance ahead of time and undertaking rigorous due diligence throughout to ensure reputable partnerships are forged is key to ensure the success of off-plan investment strategies. In the absence of real incentives to develop from scratch on a mass level, investors are well-advised to look for creative ways to broaden their holdings in the market, meaning this investment type may gain a second wind as the market reshapes following the pandemic.
Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to high net-worth and sophisticated investors, institutions as well as family offices. Ftobtsie