Off plan buying and investment timing

● Monthly Update is a Q&A with answers supplied by leaders in the NZ real estate industry.

With construction costs rising at record pace and headlines about developments stalling - what advice do you have for people buying yet to be built homes off the plans?

Peter Thompson, Managing Director, Barfoot & Thompson

Don’t be put off buying off the plans by some of the negative stories you may hear. It offers numerous benefits, and the majority of transactions are reasonably seamless. Always get sound, independent legal advice before committing, especially in relation to sunset clauses and your rights and obligations regarding possible building delays and price escalations. Think through a plan B if the project never gets off the ground or if your bank, which may be prepared to lend to you now, may not be lending in 18 months’ time when construction is completed.

Visit the location. When buying an existing or partially built home you automatically take in practical aspects such as the size of the rooms, how the home flows, the quality of the building materials and fittings, where you will you park, what the access is like, street activity and where nearby shops and facilities are located. Visiting the location, asking questions and visualisation helps you understand these aspects.

Chris Farhi, Head of Insights, Data & Consulting, Bayleys

The developer’s track record is one of the most critical elements. Developers with strong track records and larger pipelines of projects provide more confidence around the delivery of the homes. Less established developers tend to be at higher risk of deferring or cancelling developments.

Bryan Thomson, Managing Director, Harcourts New Zealand

The keys to buying property “off plan” are straight forward, and in many cases mirror advice for buying existing homes.

Firstly, make sure you do your due diligence on the location, style, and configuration on a potential property to ensure it will best meet your selection criteria. With off plan property purchases however, you need to add to your due diligence by researching the reputation and track record of the developer you are purchasing from. It is also critical that you carefully study the fittings and materials included in your build to ensure you understand the level of finishing you are agreeing to.

Finally, you must ensure you take good legal advice regarding the contract you will be signing, not just the technical construction details but most importantly what are the settlement terms you are agreeing to. Specifically what date will you be able to take possession of your new home, and what happens if the property isn’t completed by the due date.

Daniel Coulson, Chief Operating Officer, Ray White New Zealand

No matter the market you are purchasing in, it is imperative that you do your due diligence on the developer and builder of the project you are looking to secure.

While this is appropriate in any market conditions, it is even more prudent when there are constraints on supply and cost uncertainties.

Your lawyer will give you the best advice around what terms you should be prepared to purchase the property on, but we would suggest that it is important you are aware of who holds your deposit and on what grounds it can be released.

In recent times, because the market has been increasing, the time it has taken to complete a project has actually worked in the buyer’s favour. By the time the purchaser was due to settle, the property was worth more in many cases. More recently, this is not the case with every development, so ensuring that a reasonable ‘sunset’ clause is in place will allow cancellation once an agreed timeframe has been met if the development hasn’t progressed to the agreed stage (typically, Code Compliance and/or Title issue).

Is now a good time for investors to be buying? What advice do you have for potential investors?

Bryan Thomson, Harcourts

2022 has seen a significant growth in the number of properties on the market for sale. This provides all buyers, including investors, a greater choice hence allows an investor to select only those properties that meet their specific criteria. For some this will be location, for others it may be future potential, and for many it may be cashflow and return. No matter what your criteria is - having a greater number of properties to select from will reduce the level of compromise you may have had to make over recent years while supply was limited.

The age-old rule that you should buy when others are selling and sell when others are buying rings very true right now for investors so do your homework well, both on the style and location of property you prefer, take great advice regarding financing so you understand your buying capacity, and then get into the market in a positive mindset. We all know how property performs over time as an investment; so get moving now before everyone else decides to do the same.

Daniel Coulson, Ray White

No one ever rings a bell when the market hits its peak, and the same is true of when it hits ‘the bottom.’ This saying articulates what many would-be buyers wish were not the case. We suggest you look at the same fundamentals now as in any other market. Why are you buying capital gain or rental yield? How long are you planning to hold the investment short or long-term? How does the present lending environment impact your ability to purchase?

Generally, it is also important to factor in the cost of borrowing if it is required. Some commentators are now suggesting that interest rates may ease off before the end of 2022. So in some markets, a purchase today could represent a discount on a potential purchase price 12 months ago or over the coming years.

Chris Farhi, Bayleys

There’s an old adage for investing that “it’s not about timing the market, but about time in the market”. Given the long term capital gains for property, on average an investor who holds a property longer will have higher capital gains than if they waited to buy a property.

Right now with the calmer market, investors can be more selective about their choice of property and have more scope of negotiation. History has shown that market conditions can change rapidly so investors may wish to take advantage of the calmer conditions now.

Peter Thompson, Barfoot & Thompson

If your intention is to hold the investment for a period of time (let’s say 10 years given the bright line test) then now is as good a time as any to make an investment in real estate. The reason being no-one is able to forecast where the market will go over such a time scale but, based on local property records stretching back 75 years, the property will have increased significantly in value over a 10-year time frame.

My advice is to get the balance right between deposit and borrowing, focus on the mortgage repayment schedule, be prepared to maintain the property in a good state, and seek to have a good relationship with your tenants. If you are concerned about managing the property yourself, factor in the cost of having the property managed by a real estate professional.

The term ‘safe as houses’ is reputed to have been coined in the 1850s, so it has a fairly lengthy track record of belief among investors.