For this opinion piece, Jamie Johnson, the CEO of FJP Investment, discusses some of the major issues facing the UK property sector and looks at whether off-plan property investment could be a solution.
It is both common knowledge and an accepted fact that the UK is burdened with an urgent housing shortage. Owing to a deficit in available land in desirable areas against new and existing demand for homebuying, there is a significant and growing shortfall in the housing stock.
Equally, booming house prices nationally have stifled much of the incentive for developers to take the risk of constructing new homes at scale. As a result, the UK is in the midst of a housing emergency.
The oft-cited estimates which guide our thinking, and government policy, on the housing shortage reveal how stark an issue we are facing. In each year for the next decade, the UK will need to produce more than 300,000 new homes to address both the backlog in demand and the anticipated requirements from new buyers. Suffice it to say; we are falling some way short.
That the issue is so pronounced is not to say efforts have not been made to address it. Indeed, successive governments have prioritised attempts to incentivise the market to meet their targets.
For the last few decades, social housing construction on behalf of councils has been close enough to non-existent, so the responsibility for addressing the shortage falls squarely on the shoulders of the private sector.
This means that incentives, grants, subsidies, and some leeway are required to encourage investors and developers to act. In the aftermath of an economically challenging pandemic, such allowances are in short supply – and so the cycle continues.
What is off-plan property investing?
Accordingly, some creative thinking is needed to bring new stock into the housing market. Real estate is an expansive market, taking in more asset classes across different sectors than anyone could list; consequently, numerous opportunities exist which have the potential to drive a greater supply of housing. One of the lesser-known avenues is off-plan property investment.
Generally, off-plan falls under two categories. Property investors, for instance, may have an opportunity to buy a flat within a larger development before construction has started or while it is ongoing. The developers will receive an injection of cash which may help them complete the build, with the investor benefitting by buying at the lower price of an uncompleted property and can then make a quick return once it is completed and goes to market – or otherwise gain a high yield rental asset at a low sunk cost.
On the other hand, property developers may look to intervene in halted or cancelled projects where the previous builders had been unable to start or complete a project for which planning permission had already been approved.
By buying vacant plots with approved planning, developers can take on the construction themselves to the specs approved by local authorities, thereby saving substantial time and investment on navigating the design and planning processes.
With the government walking back their plans to water down planning regulations nationally in the near future, this kind of property investment has retained its allure. Research by Hamptons underlines this, suggesting that in 2020, one third (33%) of new home completions were sold as off-plan.
As the property market reshapes following the unprecedented lows and equally dramatic highs of the past eighteen months, it is looking increasingly likely that we will notice a surge back towards off-plan investments; and investors looking to expand their portfolios should assess this area carefully.
An attractive proposition?
Property investment is a business, and so naturally, most developers and investors will be attracted to off-plan investments by the highly competitive price points. Difficulties completing construction can be a major risk for those involved, and so when under pressure, there are good deals to be had.
These properties have the potential to be sold on at a profit very quickly, as investors will not have to wait through arduous planning approval processes even to see ground broken on the build.
By cutting out the design process in addition to the ever-uncertain planning application process, a substantive cost-saving is presented to savvy investors. This also facilitates a quicker completion on the development side, allowing market trends to be better capitalised upon, a reduced sales period, and earlier returns on any initial investment. Across the board, this can appear a win-win.
The allure of off-plan has only been exacerbated by the buyer trends observed over the pandemic. With remote working looking like it is here to stay, there has been a rebalancing of urban and provincial property values. For instance, while prime central London (PCL) residential has long been the ascendant property class, it has seen rental value decline significantly in the past two years, while most of the country has seen house prices soar.
As a result, those looking to invest in potentially lucrative short-term property can get in early as growth areas primed for regeneration begin to see investment pour in; in 2021, cities like Sheffield and Birmingham are looking as appealing a prospect as London or Manchester.
Risks to contend with
As with all investments, there are risks that investors must consider. Firstly, these properties will be completed to the agreed spec – which means investors are wedded to the particular design whims of the original architect and developers. Simply put, the intervening investors may not see these plans as cost-efficient or as profit-maximising in the sales period as they could be.
There is a chance that any alterations to the scheme will be waved through with little protest by local planning authorities; equally, it may require a ground-up restart of the entire planning process. This eradicates one of the primary benefits of off-plan, and so a careful balance must be struck between accruing value and preserving the innate benefits.
Equally, traditional lenders can find it hard to accommodate applicants for off-plan properties, with most not offering a specialist product for this type of investment. Accordingly, the application period can be protracted, and the delivery of funds may take longer than expected. Given the competitive nature of this investment, time is usually of the essence – any delays in receiving funding could see any bargains rising to normal market value.
Of course, so long as there is a deficit in the housing stock, prices will remain sky-high. Creative solutions to bringing new stock to meet the UK’s ravenous demand for property, at a lower price will be of great interest to developers and investors alike. With appropriate consideration to the potential risks and a solid plan to access finance and capitalise on the quick-flip investment class, off-plan should be due a resurgence in the market over the coming months and years.
Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to a global audience of high net-worth and sophisticated investors, institutions as well as family offices. Founded in 2013, the business also partners with developers in order to provide them with a readily accessible source of funding for their development projects.
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