BUYING OFF-PLAN EXPLAINED

Posted Tuesday, September 28, 2004

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Spain is one of the fastest growing property markets in the world, with property prices in some areas increasing by over 75% in the last two years alone.

Although traditional investments in the property market in Spain have performed exceptionally well, those who purchased property off-plan (pre-construction) at a discounted price have achieved much higher returns.

Unlike the UK property market, when buying a property off-plan in Spain you can, in some cases, reserve the property at a price which is well below the current market value. Reserving a property at around 30% below market value is not uncommon but where do you find these properties and why do they offer these price reductions?

A new development in Spain

The life cycle of a new development in Spain can be thought of as stages that a development goes through from planning to completion.

Once the developer secures the land and completes the paperwork for planning, the project is then complete and approval to build is acquired from the relevant authorities.
When that approval is granted, the developer arranges the bank guarantees and finance for the project.

Finally, the developer secures the contractual arrangements for the construction of the project and begins to market the properties to the initial investors.
In order to begin construction using the bank’s finance, the developer needs to be able to demonstrate that around 50% of the development has already been reserved off-plan. This is where the off-plan investors come into the equation.
By making a number of properties in the project available at discounted prices, the developer can quickly secure the sale of the initial properties required for the project to start.

During construction and as soon as the discounted units in the project have been reserved, the developer increases the price of the remaining properties in the project, bringing the price closer to the current market value.

The prices of the remaining units are further increased at different stages of the development, gradually bringing the remaining property prices up to the real market value.
Additional price increases, reflecting the natural growth of the market during a two year construction period, further increases your returns.

Bank Guaranteed equity

The investors who reserved the properties pre-construction all receive full bank guarantees for their equity. This bank guarantee virtually eliminates any financial risk to the investor.

Investor’s equity is also limited to around 30% of the price of the reserved property and this property can be re-sold at any point during construction to achieve a good return.
Here is an example:

Reserve an off-plan property costing £150,000. Equivalent properties in the same area with the same specification are selling at around £195,000 (30% more).

Your required equity (30% of £150,000) is £45,000 with the remaining 70% payable at the end of the construction, but only should you decide to keep the property for yourself rather than sell it during construction. You will also have to pay the Spanish IVA (VAT) at 7% and around 0.5% as part of the legal fees. This additional cost will increase your required equity to around £53,000.

Sell your property during construction once the price has increased by 30% to achieve a return of £45,000 on your £53,000 investment. Even when you deduct the additional costs associated with the resale of the property, you will still collect around £32,000 on your £53,000 investment and all within 18–24 months. This example represents a return on your equity of over 60%.

Finding the right property

It is extremely important that the right property is selected when investing off-plan in Spain. It is not only important that you reserve the right property, but also in the right development and at the right price.

It is equally important that consideration is given to the re-saleability of your property during construction. The company you are reserving the property with must be able and prepared to sell the property for you pre-completion.

Re-selling the property prior to completion

Many Estate Agents in Spain as well as the UK are offering off-plan investment properties in Spain. However, when buying a property off-plan with the intention of selling it during construction, you need to ensure that the company sourcing your property is prepared to place the property back on the market for you during construction.

To find out more about some exceptional but limited opportunities off-plan call Phoenix Overseas Properties on 0870 241 4108 or email info@phoenix-overseas.com to request more details.