For many years, the off-plan sales model has been an effective strategy real estate developers employ to raise capital for projects.
Buying or renting off-plan means that potential buyers or renters are making a financial commitment to a property even before it has been completely built.
While this is a very reliable capital-raising strategy for the developer, it also has several benefits for the buyer.
One such benefit is that it is a form of forward contract to lock in the price of a property and start enjoying capital appreciation immediately after the property is completed.
While this has worked relatively well in the past, inflation and naira devaluation seem to be impacting its viability
The off-plan model offers several benefits to real estate developers, such as:
Early cashflow to fund construction activity
Selling projects off-plan helps developers to secure early funding for their projects. This is because buyers are essentially providing the developer with cash up front, which can be used to cover initial project costs, such as land acquisition, obtaining permits, architectural and engineering expenses, and other pre-construction activities.
With this funding, most developers can significantly reduce the need for external financing. Savvy developers can even recycle the capital raised by investing it in initiating and funding multiple projects simultaneously.
This creates a cycle of development and sales that can lead to sustained revenue and growth for the developer.
Real-time risk gauging and alignment with market demands
In addition to cash flow, selling properties off-plan helps developers gauge market demand and buyer interest before investing substantial resources in construction.
If a developer finds it difficult to sell units off-plan, it can be an early indicator of potential issues with the project’s location, design, pricing, or overall market conditions.
This risk mitigation prevents the developer from committing further resources to an unviable project. Developers often seek investment partners or stakeholders to help fund projects.
Off-plan sales can make the project more attractive to potential investors since they can see tangible evidence of market demand and potential returns.
This reduces the perceived risk for investors compared to investing in a project that hasn’t yet generated any sales.
Building exceptional brand equity
Selling off-plan has historically helped developers boost marketing and ultimately build very strong brand equity.
This is because buyers are more likely to be interested in a property that is not yet built, as they can customize it to their own needs.
The process of off-plan sales serves as a marketing tool for the developer. It generates buzz and interest around the project, helping to build anticipation and excitement among potential buyers and investors.
This can lead to increased media coverage and positive word-of-mouth, further enhancing the project’s reputation and attracting additional funding opportunities.
While off-plan sales can provide significant advantages to developers in terms of funding, they also come with certain risks.
One of the biggest risks is that market conditions can change between the time of sale and project completion.
We conducted a survey, and this singular factor of increasing the cost of building inputs was highlighted by developers in Nigeria as the biggest challenge affecting the delivery of off-plan projects.
How does off-plan sales benefit investors?
In most cases, investors and potential renters tend to even benefit more from off-plan transactions more than the project sponsors.
Here are some of the benefits:
Benefits of a forward contract to lock in prices
For investors, off-plan sales give potential buyers the opportunity to lock in prices. Developers often offer off-plan properties at lower prices compared to what the completed units might be sold for.
This is because developers aim to attract early buyers and secure commitments to fund the project’s construction.
Buyers who get in early can lock in a lower price, potentially benefiting from future price appreciation once the property is completed. Investors who buy off-plan can lock in a price for the property, which can protect them from rising prices.
Opportunity to influence construct and design
Some off-plan sales allow buyers to modify or customize certain aspects of the property, such as finishing, fixtures, or layout.
This level of personalization can enhance the property’s appeal to potential renters or buyers in the future. Investors who buy off-plan can get involved in the design process and have more control over the final product. In addition, buyers who purchase off-plan often have the advantage of selecting their preferred unit within the development.
This could mean choosing a unit with a desirable view, better orientation, or a more convenient location within the project. This customization can add value to the property and make it more appealing to future buyers or renters.
Flexible payment terms with capital/rental appreciation even before handover
Investors who buy off-plan can benefit from capital appreciation, which is the increase in the value of the property over time. If the real estate market experiences growth during the construction period, the value of the off-plan property could increase before the buyer takes possession.
This price appreciation can lead to capital gains for the buyer even before possession, potentially resulting in a good return on investment.
Developers typically offer flexible payment plans for off-plan properties. Buyers might be required to make an initial deposit, followed by staggered payments over the construction period.
This flexibility allows buyers to manage their finances and invest in real estate without a large upfront payment. If the buyer’s intention is to rent out the property, purchasing off-plan can lead to higher rental yields.
Since the initial purchase price is lower compared to the potential market value after completion, the rental income generated provides a better return on investment.
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