Knowledge Base

20

May

2017

Off Plan Real Estate: The Good, The Bad, The Risky

By Reuben     Tags :  



Off Plan Real Estate Investments in Kenya

Buying into off plan real estate in Kenya presents opportunities to earn superior returns. However, off plan real estate opportunities also present significant risks. To be a better investor, equip yourself with this knowledge.

Introduction

Off plan investment refers to the purchase of property before completion, generally driven by the high price of real estate and the long time taken to deliver units. Buyers purchase the property at the plan or design stage of the development. Prices of off plan properties can be up to 50% less than the price of a completed house.

Processes Involved

The process of purchasing a property off plan begins with the signing of three documents:

  • the Reservation Form,
  • the Letter of Offer
  • the Sale Agreement

In an off plan property purchase in Kenya, the developer promises to deliver a parcel of land, or completed unit to a buyer at an agreed price at a future date, subject to the developer obtaining all necessary approvals in respect of the development from the relevant authorities and satisfying any conditions necessary to finalize the development.

In most cases, the buyer must pay the developer a deposit upon signing the contract, with the balance of the purchase price due at the settlement date, or via a specific payment plan.

Purchasing off plan real estate in Kenya has its advantages:
  • Higher capital gains: Buying off plan allows investors to acquire a future asset at today’s price and hence in a rising or a peaking market, the buyer achieves capital gains, and on completion they have a significant margin. Some developments have yielded over 50.0% price appreciation. For instance, The Alma in Ruaka by Cytonn Real Estate, which is at 55.0% price appreciation 9-months into construction.
  • Flexible payment plans: To purchase a property off plan all one needs is a deposit, which is usually 10% to 20% of the purchase price, and the rest of the amount is either paid on completion, or in flexible periodic installments. This allows individuals without the financial muscle to purchase houses immediately to acquire homes they would otherwise not afford.
  • Preference: The buyer is able to select the best location for his or her house and can also get to pick the finishes of the house and get a house that is in line with their preference as opposed to buying a complete house where he/she has to settle for whatever has been provided for by the developer in the locations that have been left over by early buyers.
There are risks to purchasing property off plan:
  • Capital loss: The buyer can lose the money invested in case the developer was fraudulent.
  • Poor quality construction: Sometimes developers use very attractive brochures to advertise, but deliver substandard products hence the buyers do not get value for money unlike when buying a complete unit where one negotiates the purchase price based on tangible evidence.
  • Project delays: More often than not, developers are not able to complete the houses in the promised time frame and this can affect the buyers’ financial plans.
  • Lower returns: In rare cases, market conditions may change or the developer may over promise returns such as rental yields and capital appreciation which are not realized by the buyer of the property
  • Fraud: During the past month, a number of property buyers have come forward to report having been swindled by developers in off plan real estate purchases.

Cytonn Diaspora offers several quality investment ready off-plan properties with flexible payment plans.

To be a successful off-plan property investor, contact our financial advisers at diaspora@cytonn.com.