Pros and cons of buying off-plan

The off-plan market is supposed to benefit the developers as they can secure funds and sales before the start of the construction work, and also the buyer, as they will usually be able to purchase at a lower rate with favourable payment options.

However, while buying off-plan offers many advantages over buying property on the secondary market, there are also risks that potential buyers should consider.

Off plan benefits

One of the main advantages of buying off plan - especially when the development is first launched - is that the price of the property will be lower than it would be at resale.

Developers typically will offer discounts of between 15-20% to encourage initial investment and help pay for ongoing development costs.

Off plan buyers also benefit from not having to pay the entire purchase price of the property up front. Instead, buyers usually are required to make a down payment of 5-20%, with the balance of the amount paid over a period of one to seven years.

For buyers who intend to live in the property they are purchasing, another advantage of buying off plan is that they often get first choice on available units in the development. They can also have a say in the various fitting options available, including the types of kitchen, units and flooring.

Off plan lures investors

Buying off plan is popular with investors as there is potential to sell the property prior to completion, says Vincent Easton, sales director at Sherwoods Independent Property Consultants.

Indeed, speculation in the property market has been rampant in Abu Dhabi, where there are no laws that bar investors from 'flipping' the ownership of an uncompleted home for a profit before the property has been built.

According to a report by the Royal Institution of Chartered Surveyors, approximately 80% of real estate sales in the UAE capital are considered speculative investments.

Speculators have been flocking to Abu Dhabi because of the staggering gains that have been seen in the emirate's housing prices over the past few years. The boom has been fuelled in part by a shortage of properties, which the government has engineered by controlling the delivery of supply to avoid a glut.

A recent report by Morgan Stanley has predicted that property prices in Abu Dhabi are set to continue rising until at least 2012, by which point supply is expected to catch up with demand.

Off-plan pitfalls

Buying property off plan is not without risks, Easton points out. One of the main disadvantages of buying off plan is that you cannot see what you are getting.

Buyers have to base their purchase on the word, reputation, and past record of the developer, as opposed to seeing a finished product first hand.

Another downside of buying off plan is that purchasers often have fewer financing options, as finance companies usually are reluctant to provide funding if they are not able to see the finished property.

In some cases banks will sign agreements with developers to be exclusive mortgage providers for a specific development, in which case the buyer is tied down to the applicable mortgage provider and is not able to shop around for better rates and prepayment options.

Another downside of buying off plan is that delays in the delivery of the finished product are common, which means that buyers who intend to live in the property may not be able to move in when they had planned. This can also create cash flow problems for the purchaser.

For investors, buying off plan presents different risks. 'The real danger lies in speculation, where a buyer effectively bets that the value of the property will increase - in many cases before they need to make the next payment to the developer - and trade accordingly,' Easton said.

'This relies on a sharp increase in capital values. However, if values fail to rise the speculator is legally committed to making further payments.'

At present there are currently no escrow laws in place in Abu Dhabi for investor protection. However, some master developers in the UAE capital are beginning to self-regulate the resale of their developments to safeguard against speculators.

For example, Aldar Properties, the largest developer in the emirate, is imposing new restrictions on resale of its projects, especially in the off-plan stage. The changes will be implemented on all apartment and villa sales from October and be applicable for all of the company's future projects.

Off-plan dos and don'ts

Potential buyers of off-plan property must do their homework about the developer and the development prior to making their purchase, Easton warns. It is important to measure the credibility of the developer by finding out what it has built in the past and how it handled these projects.

Another important step in the research process is visiting the site to determine whether the developer has been accurate in describing the surrounding area and the views that the buyer would have from the apartment unit or villa. This is critical in determining the likely premium in the secondary market.

Proper due diligence also includes reading all documentation, especially the sales and purchase agreement, which contains important information about proof of ownership, resale restrictions, penalty clauses, and building delay penalties.

A common mistake that off-plan buyers make is entering into a reservation agreement that commits them to signing the sales and purchase document, even if it has not been written yet.

Finally, use a reputable agent, as the documentation can be complex and difficult to read, especially if English or Arabic is not your first language.