How to appraise an off-plan buy-to-let opportunity

Before we consider offering an off-plan investment to our clients we have a huge 100-point checklist to ensure it meets all our criteria.  Off-plan can offer great opportunities to purchase a property below market value and get in early on up-and-coming areas. However, they do come with risks mostly gravitating around the fact that you will need to wait for the product to be delivered, sometimes up to 2 years.

If you are researching a number if investment opportunities go through our step-by-step guide below to help you appraise the investment yourself. There are 2 levels to this process

1. Due diligence on the developer
2. Research on the property specifics

Step 1

Research the developers track record. There are a lot of developers offering investment products. Some are young, others have been in the business for decades. You will want to look at all pass success and the level of deliverability.

Sometimes developments full through, don’t get completed, under perform in occupancy or just don’t sell. Some developers are new and have no track record which is obviously a huge risk factor. As further due diligence we would look to see if the company is in either an SPV or is part of a development group.

Step 2

Check for planning permission. You can do this on the local council website to ensure planning permission has bene submitted and granted. Anything other than fully granted is a no go.

Step 3

Research the funding of the development. Many developments will come as a commercial lending which require 10%-20% deposit on the development cost. This may not be the case if it is a large developer such as Berkeley homes who will be cash rich. A development which is funded through cash obviously comes with lower risk benefits, whereas those that use commercial loans depend largely on selling the units off-plan.

From this look at the company’s financial history to ensure they have successfully navigated commercial lands on a consistent basis without many or any red flags. This will involve researching them through Companies House to ensure cashflow and balance sheets are all in a healthy position. The first 3 steps are largely based around the due diligence of the developer themselves.

Step 4

Next, we will look at rental and sales values of the properties being offered at the stage of completion. We would then compare the property price when sold off-plan to the forecast price when completed. This will give us an early indication on what can be made through capital appreciation just in the build time alone. These numbers will need to stack up and compete with what we know is possible to achieve in the area. An example would be… we know through experience a yield of 6-7% is possible in the Northern areas of England, if we are seeing 2%-3% we would stay clear, purely based on the fact that we know we can achieve better. You can do this research for any location to find out the average yield.

Using Zoopla or Rightmove you can get property prices and rental prices of near identical properties and work out at the very least what a gross yield would be. From here you can work out a rough NET yield by deducting other costs such as service charge, ground rent, advertising fee and management fees.

Step 5

Location research is another massive factor. An area which is seeing a lot of regeneration for example, is a great sign to us that the property prices may increase, along with the fact that this additional boost to the area will increase jobs and thus occupancy and rental values.

A good example is The Peel Group who have led the regeneration of MediaCityUK in Manchester have shown their ability to develop areas. Therefore, companies like X1 will follow where they go (as would we) as this is a sign that we could see strong growth for the area’s economy in the mid to long term.

Step 6

We also look to see if the demand in the location matches what the product offers. An example would be a student city such as Liverpool over the last 2 decades has been craving for more student accommodation. As a result, many successful student developments have been delivered over the last few years. Service accommodation is another example. If a development has short-term lets, which is a huge opportunity for investors to make much higher yields. We will look at the demand of tourism in the area to ensure that occupancy rates can be met. Often around 80% for STL model.

For more help you can request our checklist specially adapted to help any novice investor conduct their own due diligence on any buy-to-let opportunity.