It is common practice for large residential units in the United Kingdom to be marketed “off-plan” to the overseas market. Typically, buyers from China, Hong Kong, Singapore, Malaysia, the Middle East and Russia welcome this approach. It is not unusual for flats to be sold sometimes even before construction has completed and in some cases even before construction has started.
Occasionally, a flat may, in fact, be purchased in the early stages of the development by an opportunist buyer and then re-sold to an onward purchaser for an increased amount; all in advance of the completion of the project. This is currently happening at the regeneration of Battersea Power Station on the River Thames in south London; one of the British capital’s newest and most recognised residential developments.
There is a temptation to brand this tactic of profit-making as underhand or even market manipulation and exploitation, but it is totally legal. The question is: who are the losers in this?
Answer: well… nobody, actually.
The developer — developers are at the helm of the project. They make all of the hands-on “property” decisions and will be responsible for bringing the project to its completion. However, they need money to do this and it’s not always as straightforward as being able to borrow from the bank, with a few high-net-worth investors and mezzanine-debt providers to top up the surplus required. Developers use, and need, the pre-sales income from the early off-plan buyers to fund the project. Without these early sales the development will not happen. Period.
The investors in the scheme — equity providers and high-net-worth individuals, in particular, like to make their hard-earned cash work for them by making more money, fast. When it comes to development deals, they like to make it back quickly and with as little as risk as possible. If an investor wants to invest in a development scheme, knowing that 50 percent of the expected income will be supplied, say, two years before the project completes, they are in a much stronger position knowing that their risk is substantially reduced. The less risk, the higher the likelihood of money being invested.
The early buyer — this is perhaps an obvious one, but the plus side for the early buyer is even better than at first thought. The Battersea Power Station regeneration scheme is the perfect example of this.
An opportunist buyer bought an apartment for an estimated £711,000. Just a year later, (s)he sold the same flat for an alleged £865,000, making a profit of circa £155,000. However, to secure the property (s)he only needed to put down the required 10 percent deposit of circa £71,000 — which is an impressive 218 percent return on the money put down.
The end buyer — property is an open market and no-one will pay a price for a property unless they are happy to do so. The end buyer may lease the property out for a number of years and enjoy the benefit of a healthy yielding income, and/or (s)he may, perhaps, sell it five years down the line for a healthy profit.
Knight Frank recently revealed that 49 percent of all £1 million (€TK million) plus residential sales in prime central London went to foreign buyers. 51 percent of newbuild purchases in the prime central London market were by UK residents. The percentage swayed more toward the UK buyer as the price dropped below £1 million and also as the location moved further out of prime central London.
How does one sum up this cycle?
However, let’s not forget that these profit-makers are also gambling on the market and that there have been many horror stories that don’t hit the headlines — a stark contrast to the exceptional successes reported. Boom or bust, the opportunist constantly and continually endures the risk that, if the prime property market were to decline in value, then that same opportunist buyer would:
be legally bound to complete on the property; and
make full payment; and
take the hit on any negative equity.
It is a simple case of possibly winning in a rising market and potentially losing in a stagnant and/or declining market that you might not see coming, but it also depends on whether you are willing to roll the dice.
There is a saying that “one has to speculate to accumulate”. Never is this truer than in off-plan dealing and property investment. It’s your choice. It’s your gamble. It’s your gain or loss. But one thing is for certain… you have to be in it to win it!