Off Plan Emerging Market Vs Discounted Developed Market

A new trend seems to be emerging in certain property circles. Several times in the past six months I have seen evidence of hardened investors who have always pursued an off plan investment strategy considering a radical change.

The profitable strategy of the past decade is fairly simple on paper ” find a reputable builder, reserve an apartment in a great location which will be built in 2-4 years time, negotiate preferable payment terms and wait for capital appreciate during the construction stage. Definitely not as easy as it sounds, but hundreds of thousands of people have been doing it successfully.

Times are changing though, and these same hardened buyers are now pursuing a new strategy with equal vigor ” instead of off plan apartments or condo hotels in emerging markets, they are snapping up completely finished properties in developed markets at discounted prices.

Why? The credit crunch. Developers are struggling to sell excess stock, which means they are under pressure from the banks that financed them. This forces them to drop prices dramatically to stimulate supply and boy are they doing it. I have seen prime urban properties in very wealthy cities selling cheaper than an off plan resort in an area with a fraction of the income per capita.

Spain is one area where big discounts are available, but you must be careful not to purchase the wrong kind of property. Generally speaking, I would advise buyers to stay clear of large developments (I get nervous when they are bigger than 300 units) and high density developments ERP accounting system (more than 3 stories). You should be purchasing units that are least 30% lower than the previous purchase price and that are at least 65% sold (to avoid risk that community fee system will collapse). And of course, don’t purchase off plan – with hundreds of thousands of unsold finished properties available all over the country at bargain prices, there’s simply no need to take that risk.

Surprisingly, the United Kingdom, the world’s 6th largest economy, is another area where both domestic and international investors are taking advantage of record low prices. Demand has dropped dramatically in the past 18 months, but so has supply, there was less than 6000 properties completed in October 2008 in the whole United Kingdom, the lowest since records began. With 30%+ discounts available in central London and 40-50% discounts in Birmingham, many are taking advantage of favorable rental yields and are patient to wait 4 years+ for capital appreciation.

 

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