Introduction to Off-Plan Property

Off-plan property selling has become a widespread practice all over the world. Developers across the world, whether in China, Canada, the United States, or Dubai, are practicing this approach to attract investors globally. The situation in Dubai is not so different - the real estate market has grown and developed significantly within a very short period, with off-plan properties having been the key drivers of investment.

The rise of Dubai, especially after the Great Recession of 2008-2010, was based on strategic urban planning, favorable economic conditions, and the establishment of regulatory authorities such as the Real Estate Regulatory Agency (RERA). These factors have combined to make the city a favorable destination for real estate investment, and off-plan properties have played an integral part in shaping the dynamics of its real estate market.

Off-plan properties have gained immense importance in today's real estate market, especially in the rapidly developing city of Dubai. For investors, an off-plan property is viewed as an opportunity to invest in brand-new real estate at a potentially lower price - the properties are expected to rise in value by the time it gets completed making the investor realise high returns.

For developers, off-plan sales are crucial for demand and supply management in the real estate market. Through managing the release of new units in the market, developers can influence the prices and market equilibrium. To elaborate this further and in simpler terms, stability of the market significantly depends on the rate of new developments and other exogenous economic factors. For instance, the release of substantial units within a short period could result in oversupply, which may lower the prices as explained through the demand and supply principle. The off-plan property market is one of the most influential in Dubai, with tens of thousands of new units being introduced every year.

When it comes to real estate, choosing between off-plan and secondary market properties is a critical decision for buyers and investors alike. This Real Estate Guide delves into the differences between the two, helping you make an informed choice tailored to your needs and goals.

Off-plan properties are those houses or buildings that get sold before actual completion. Investors invest in the idea or the blueprint of a property, which is expected to appreciate beyond the purchase price when finished. In such a purchase, the investor secures a property at today's price on the assumption that its value will rise upon completion. However, off-plan investments require great patience and involve some sort of risk, as the buyers do not get possession until construction is complete.

Who Buys Properties Off-Plan?

Generally, off-plan properties appeal to investors who are mainly focused on long-term growth and can afford to wait for the investment to mature. In most cases, these buyers would prioritize the potential future gain over the immediate returns. Therefore, this makes off-plan real estate investment suitable for people willing to take calculated risks.

Supply and Demand

The availability of off-plan properties is directly proportional to the speed of new development. In growing markets such as Dubai, which are witnessing continued urban growth, off-plan property supply can always be expected to be in adequate supply. Many developers usually release several projects that present buyers with numerous options. At times, though, the release of too many units simultaneously contributes to over-supply, affecting the price and other broader market conditions.

How Does Pricing Compare?

Generally, off-plan properties are cheaper compared to finished ones, such as resale or secondary properties. This is a price discount that considers time and risk while the property is under construction. Most of the buyers also secure an early-bird pricing system when they invest in a property at better prices before its completion. Thus, all these incentives have attracted off-plan investments by every investor who aims at gaining maximum return on their investments.

Appreciation Potential and Trends

One of the major positives for investment in an off-plan project is the significant appreciation it can achieve. During the period of its construction, if the market grows, its value shoots up by the time the property is ready. These huge potential appreciations make them an attractive option for an investor who looks for better returns. However, market conditions can change any time, and there's always the possibility it may not appreciate as expected or even worse depreciate.

Secondary properties, also known as completed properties, are real estate that is available for purchase in the open market. These are properties ready for immediate occupation or renting, giving buyers the opportunity to start receiving rental yield immediately. The value of secondary market properties depends on the current market conditions and is often seen as a lower-risk investment than an off-plan property.

Who buys secondary homes?

Secondary properties are more attractive to buyers who value moving in immediately or plan on generating rental income from it. These kinds of buyers are risk averse and appreciate the stability and predictability that comes with purchasing a completed property.

Demand and Supply

Supply of secondary properties is fixed in the short run by existing housing stock in the market. In contrast to the off-plan properties, whose supply is controlled by the rate of new development, the supply of secondary properties is more constant. However, market conditions can affect the number of deals that actually go through: the actual volume of desirable properties may shift up or down depending on economic conditions of the host country.

How Do Prices Compare?

Secondary properties are generally priced higher compared to off-plan properties, mainly for their availability to be used immediately and, in some cases, producing rental income. Prices of these properties tend to reflect the current real market prices with some of the main defining factors being location and attractions located around the area. While its initial costs may be higher than that of an off-plan property, this type of real estate assures immediate ownership and are considered to be stable and secure investments.

Appreciation Potential and Trends

The appreciation potential in the case of secondary properties is quite steady and more predictable. Variables of location, condition, and prevailing market trends are extremely important in ascertaining appreciation rates. While the secondary market properties may not appreciate significantly as do the off-plan properties, the lower-associated risk makes such properties attractive for investors who aim to invest more conservatively.

Pros

Immediate Possession:

The secondary properties are already constructed and thus ready for immediate occupancy or renting. This is appealing to buyers who need to move in or for generating instant rental income.

Predictable Investment:

The value of secondary properties is premised on current market conditions, and for this reason, they are less speculative than off-plan properties. A buyer can assess the condition of the property, its location, and surrounding infrastructure to gauge its potential.

Stable Rental Income:

Since these properties are fully constructed and ready to be rented out, secondary properties have proved to be one of the best options for investment with continuous cash inflow.

No Construction Risks:

An individual can avoid the risk of construction delays, overruns in budgets, and uncompleted developments.

Appreciation Trends:

Secondary properties appreciate at a more constant rate, driven by location and market trends, making them a safer, long-term investment.

Cons

Higher Initial Costs:

Secondary properties are usually more expensive at the outset than off-plan properties - these properties are fully constructed and can be used or rented out immediately.

Limited Customization:

Unlike off-plan properties, buyers have limited choice in the design and features of a property - secondary properties are fixed in terms of layout and design of the property.

Wear and Tear:

Since secondary properties are already built, they may need maintenance or repairs depending on their age and condition. The buyers need to be prepared for the additional costs that come with upgrading or fixing the property.

Lower Growth Potential:

While the values of secondary properties can appreciate, their growth is often more restricted compared to an off-plan property.

Supply Constraints:

The availability of secondary properties is subject to the existing stock in the market, which may increase or decrease depending on the economic cycle within the host country. In highly competitive markets, there could be less desirable properties available with the buyers facing stiff competition.

Pros

Lower Purchase Price:

Off-plan properties are usually priced lower than secondary properties at the time of purchase, giving buyers the opportunity to secure a property at a more affordable rate.

Appreciation Potential:

One of the major strong points of off-plan properties involves their potential for high appreciation. As long as the market grows through the period during which an off-plan property is under construction, investors stand to witness a massive return on their investment on completion.

Customisation Options:

Most off-plan properties allow buyers to customize design, finishes, and layout to a certain degree. This gives the buyer a chance to personalise their property according to their preferences before it is completed.

Early Bird Pricing:

Buyers may receive early-bird pricing or other developers' special promotions to secure initial interest in the project, possibly much cheaper than buying afterwards.

New Construction and Modern Features:

Off-plan properties often come with the latest construction standards, technologies, and amenities, such as smart home systems and eco-friendly features, which make them more appealing to modern buyers.

Cons

Construction Risks:

The main risk about off-plan properties is that they have not been built yet. Buyers may face construction delays, overruns in budgets, or issues with the developer, which could delay possession or affect the quality of the finished property.

Market Uncertainty:

The value of off-plan properties is speculative and may float on market fluctuations. Since it may take some time before the construction is complete, if there is a market downturn during that time, buyers may find their investment not appreciating or, in some cases, decrease.

Longer Waiting Period:

One of the main drawbacks with off-plan properties is waiting for the construction to complete, which could take months or even years. This delay can be frustrating for buyers who need to move in quickly or start earning rental income.

Limited Immediate Income:

Since off-plan properties are not ready for use or rental until after construction, buyers do not have the opportunity to generate immediate income as they would with secondary properties.

Uncertainty about the Final Product:

The final product of an off-plan property may be different from the initially planned or anticipated designs. The developers may be able to share all the plans with the buyer, however, once the property is fully complete, it may not be exactly what was envisioned when investing in such a property.

Example: The case considers two investors - one who invests in off-plan properties, and one who buys secondary properties. In one case, the off-plan may have enormous appreciation in the value of the property over the period of five years but without income until the property has been completed and rented.

On the other hand, the secondary property investor generates rental income immediately, reinvesting this capital into additional properties - this investor might benefit from both rental income and the capital appreciation of their properties, leading to a more diversified and potentially less risky investment strategy. 

Interested in learning more about off-plan properties and secondary market properties? Contact LYM now!