Property investment: Plan to profit

Graham Norwood looks at the world of buying off-plan and under market value

Buying "under market value" (UMV) is the latest property market buzz-word aimed at canny investors. By making UMV deals, they hope to make a killing by buying into new schemes at a very early stage, when the developer will offer a discount to get the ball rolling.

So far, so good – but what does it really mean?

The strongest advocates of UMV deals are the property investment consultancies who buy in bulk and resell units to investors. But anyone can buy UMV if they look in the right place at the right time.

Strictly speaking, any off-plan purchase (that is when you buy a property before it is built) may become a UMV deal in a short time. This is because when an off-plan flat or house is built – normally six months to a year later – its value may have appreciated to a market value well above the fee paid by the buyer.

Cannier individuals do even better. For example, you can buy an off-plan show home (often the first one built on a scheme, located near the entrance and well maintained) and then lease it back to the developer for an extra return.

"A developer gets cash flow at an early stage and offsets the rent he pays against tax. The buyer gets rent and a show home fully furnished, and then probably gets above-average capital appreciation because they bought off-plan and below full market value" explains Gary Plant, who runs www.investinashowhome.co.uk.

A few hardcore investors also seek out the final units in a scheme when every other home has been sold. These investors then use their experience to bargain hard with the developer, who may part with the final one or two flats UMV to avoid expensive security and insurance on a site.

But the largest potential gains come when a heavily-funded property consultancy or consortium makes bulk purchases of scores or hundreds of flats or houses "very off-plan" – sometimes two to four years before they are built.

The bulk purchase is funded either from individual investors sinking their money into the consortium, or through an institutional loan. Either way, the funding allows the consortium to negotiate large price reductions.

Some developers – especially in so-called overseas emerging markets with no previous record of international investment such as Brazil, eastern Europe and parts of Africa – are grateful for these bulk purchases. They provide financial security and avoid the developer incurring marketing costs to sell to lots of individual buyers.

"If a seller is motivated to part with the property, if you are in a strong position with cash and you can demonstrate your credibility, then you can achieve some excellent prices," insists Jonty Crossick, who runs investment club, Ready 2 Invest.

Crossick says he has a strict process for determining if a scheme can be bought under market value. He looks at five comparable units either in the same or similar location, then measures the cost per square foot of each and compares the average with the discounted price of the new homes he is viewing.

"I aim to buy at 20 to 45 per cent under the market value. Therefore, even if the market falls you probably won't lose. If you buy a property worth £100,000 on the open market but get it 20 per cent or £20,000 under market value, you can absorb a fall of 10 per cent and still make a profit," says Crossick, who believe his theory helps whatever the market conditions.

Of course, there is one major caveat in all this. The biggest UMV discounts and largest potential profits will be made in what many property observers believe to be the riskiest locations. Even the UK show homes, for example, carry above-average risk – the developer could go bust and the scheme never be built, or remain a building site for longer than expected, damaging the value of your investment.

And it is no coincidence that the highest-profile overseas UMV deals are in emerging locations such as Brazil, Turkey, Romania and the United Arab Emirates. Nor are they even in the most obvious tourist locations in these countries – instead they tend to be buy-to-let style properties in big cities or holiday-style properties in unestablished locations.

"In many of these locations, it may be hard to get a competitive mortgage and few mainstream estate agents will be operating, adding to the level of risk," explains a spokesman for the International Law Partnership, a legal service for Britons who are intending to buy overseas.

Even so, pioneering British investors appear to be happy to try UMV purchasing – Ready2Invest routinely reports that schemes sell out within a few weeks. The buzz word has found willing listeners.