For many property seekers in Pakistan, purchasing off-plan properties remains a largely unexplored option due to the potential risks associated with it. However, buying off-plan properties can be more affordable and flexible for both home buyers and property investors as compared to existing properties. So, with that in mind, we decided to create an analysis of how to mitigate risks on off-plan properties?
We will begin with understanding the meaning of “off-plan properties” and then move on to discuss some risks on off-plan properties and some tested ways to reduce them.
Some Potential Risks on Off-Plan Properties and Ways to Reduce Them
Investing in off-plan properties means committing to purchasing something that hasn’t been built yet. A buyer of such property only knows one thing for sure, which is that a structure will be constructed upon it, but when? – It isn’t entirely obvious at times, which is a turn-off for quite a few investors, while others see this as a chance of growth and secure their investment in lower-priced property.
Besides profit, buying off-plan property has its own set of rewards for investors – not to mention a lower buying price. The risks, however, are discussed below:
Risks on Off-plan Properties
Investing in a vacant piece of property comes with its own perks and risks, especially when the project construction is not in control of the investor, and they have to rely on developers. Although a blueprint of the project gives an idea about the future structure, the doubts still exist. Here are some potential risks associated with investing in off-plan properties:
- Delay in Project Delivery: No matter what the developers have promised, project delay is quite a common issue with purchasing off-plan property – so common that it is becoming a norm and thought of less as a risk. Almost half of the projects in countries like Pakistan are delivered at least one year later than promised, some considerably more. The reasons are plenty, including legal obligations, supplier delays, construction permits, and not to mention unforeseen weather conditions. Project delivery is also highly affected by labour strikes, changes initiated by the developer, revisions and alterations in the masterplan, and intervention by third parties. However, each delay costs time, which can range from days to weeks and sometimes months to years. These delays are sometimes beyond the control of the developer and leave them without liability.
- Financial Circumstances: When investing in off-plan properties, investors need to deposit at least 20-30 percent of the full amount as a down payment and have to pay a few installments that may cover up to 60 percent of the full payment during the construction. While the remaining payment is made upon completion, which more or less amounts to 10-20 percent. However, most common payment plans are designed with the rule of 50/50. Say if a property seeker pays one installment but isn’t quite sure about the next one, then this can be a problem. Nobody is sure of what the future holds, and property seekers can encounter unforeseen circumstances, including losing a job, banks altering their lending policies, and an increase in property taxes, to name a few. And this is precisely what the 50/50 rule is all about.
- Market Price of the Property: Market price risks occur in every real estate market around the world, and it isn’t something new or unexpected in Pakistan’s property market as well. The cash-flow in the real estate market is, although always positive, no one can guarantee the fact that it will remain positive throughout. As the market evolves and matures, the risks associated with off-plan properties also increase. In simple words, investors are not always certain if the rule of “buy low and sell high” will apply to the project after its delivery.
- Quality Risks: Here’s a situation: the advertisement of off-plan property you’re going to invest in looks amazing and fantastic, and you’re convinced that the developers will deliver as to what they have promised. But what will happen if the contractor cuts corners and delivers a structure a little less fantastic than you imagined it to be? Even if the product looks like the picture, quality risks are high with investing in off-plan properties.
Mitigating Investor’s Risks for Off-plan Properties
It goes without saying that before committing to an investment, there are a number of things to check when purchasing an off-plan property. So, here are certain ways for mitigating investor risks on off-plan properties:
- Experienced Developer: Developers trade on nothing but their goodwill and reputation in the local real estate market. They understand the need of the investors and have a clear idea that the quality of their completed projects has a deep relationship with their name and future sales. So, it is only natural that investors will be attracted to the name and the history of the developer rather than what the brochure says. In this regard, you can take help from Zameen Partners and stay away from taking unnecessary risks.
- Research: If you have completed your research on the developer, the next thing is to investigate the location and the future developments taking place in the neighbourhood. This step becomes even more crucial when you do not have a clear idea about the completed project, so the characteristics of the location and neighbouring infrastructure is a shoulder you can rely on. In this regard, investors should carefully consider the quality of the nearby housing societies and monitor their prices using Zameen’s property portal. They can even have a digital survey of the neighbourhoods in Pakistan via Zameen Area Guides.
- Market Opportunities: There are numerous ways for mitigating investor risks on off-plan properties, and one of the most popular is going beyond the location factor. We’ve already discussed that ensuring you work with a reliable contractor is a keystone of successfully purchasing an off-plan property and making profits out of it. Even if the developers have a proven record of delivering successful projects, they are still bound by where the local real estate market goes. So, if you want an analysis of market trends, you can easily see how the real estate market of twin cities have performed. It doesn’t matter if you want to invest in Lahore’s property market, we’ve answered the most asked question if it’s a good time to invest in Lahore in our h1 market report. For those of you who are attracted by investment opportunities in the city of lights, we’re glad to guide you via our h1 report on Karachi’s real estate market.
- SWOT Analysis: SWOT analysis is a great way to weigh down the strengths, weaknesses, opportunities, and threats related to investing in off-plan properties. It is one of the most simple and effective methods for mitigating investor risk on off-plan properties since it gives you a clear view of financial growth, payment strategy, and management planning while reducing as many threats as possible.
Regardless of what red flags you see near off-plan investment opportunities, there’s always a way out to make it the most successful transaction you’ve ever made. So, many real estate experts suggest that land investment is the best investment, and as Louis Glickman, a widely-known real estate expert and investor, puts it, “the best investment on earth is earth”.
If you still have any questions related to risks on off-plan properties, you can get in touch with us at blog@zameen.com. For more investment tips and tricks, subscribe to Zameen Blog – Pakistan’s most trusted property portal.
