People all over the world are fascinated by property. Many dream of owning an investment property or even a property portfolio and living off its income. But how many achieve this goal and retire early to pursue their ambitions? My guess is not many.
When it comes to buying property off-plan, the deck is stacked against small investors. Information and timing are critical to generating wealth, but access to information is out of reach for all but the privileged few. Without this information, small investors can't make fully informed investment decisions.
Small investors are often bombarded with fake news about investment opportunities crafted by those who have the most to gain by selling them. Overwhelmed by inaccurate and misleading information, most small investors make poor property investment decisions and ultimately pay far more than they need. In doing so, they are lining the pockets of property agents and marketing companies who prey on their lack of knowledge. It is not until the property completes that they realise they didn't quite get what they had hoped to buy.
The current market reality
When buying off-plan, small investors currently have little choice but to endure an antiquated system. Access to investment property takes place via the high-pressure property exhibitions that regularly take place in the world's capital cities, particularly in Asia and the Middle East.
Property development marketing through property exhibitions was an effective way to generate awareness in the early-2000s, at a time when investors' understanding of property investment was generally low, so international investment experts’ presentations were a necessity. Time has moved on, investors are savvier, but property agents have just kept on running the same property exhibitions.
In the early 2000s there weren't many property exhibitions, but now there are thousands, and as competition has grown so has the cost. Ultimately, someone must pay the bill, and it is always the investor. Marketing through property exhibitions adds between $US 25,000 to $US 50,000 to the purchase price!
Not only are investors paying for market access, but they are also making decisions based on highly biased information produced by so-called 'property experts.' These experts generate vast quantities of market information designed to create a frenzied demand for property. Whether or not the investor gets a good deal does not come into the equation - the sale is all that counts.
A massive industry has grown on the back of the promotion and sales of the off-plan property market. Other industries have seen tremendous technological advancements, which have improved their processes and created tangible benefits for purchasers. However, the property market has remained stagnant and stuck in its old ways. Why is that? It is because there is little incentive for those in the property market to drive change.
A better solution
Investing off-plan can be highly rewarding. However, there is no magic negotiation tactic or shortcut investors can use to win. As a small investor, you win by understanding the market, grasping how it works, and by leveraging this knowledge.
With second-hand property, a unique product is for sale to a high number of buyers. Investing in off-plan property is different - developers are selling a ubiquitous product to a smaller pool of buyers. For investors buying off-plan, the shoe is therefore on the other foot!
As an investor, if you can recognise this market reality and understand the risks and costs associated with developing, promoting, and selling new development property, you can win by reducing risk for developers and leveraging the unique role you play in funding new development to your advantage.
How do I know?
I used to work on the other side. I built one of Asia's largest international sales businesses at Colliers International. I have worked with some of the world's largest residential property developers, promoting property to interested buyers.
During that time, I have been responsible for the sale of billions of dollars of real estate. I have seen both sides of the coin. I have seen savvy investors make wise investments and build valuable portfolios. However, I have also often seen investors making poor decisions based on insufficient information and ultimately paying the price. Either way, as the agent, we made a lot of money!
The stark reality is that most small investors get pressured into buying property off-plan at inflated prices. The inflated costs cover the enormous amount of money demanded by the off-plan sales industry to cover the cost of excessive marketing budgets, property company overheads, and the massive fees required to motivate those selling property. It's not personal; those who have the most to gain in the industry don't want to rip buyers off. They want to sell a property at the highest possible price, and get paid their fee!
However, the reality for investors is that there are huge costs involved. The cost of marketing and promotion alone can cost between 10% to 20% of the purchase price. These costs don't include the additional fees and taxes investors must pay to buy the property.
Why have I written this book?
After years of working in the chaotic new-build sales business, I saw a better way. I am passionate about the residential development industry. I genuinely believe that off-plan investors make a dramatic difference to the development of communities and that they provide excellent quality new housing to rent to those who want to make their way in the world. Rather than being to blame for the terrible state of housing markets, buy-to-let investors actually help solve housing problems by providing developers with the ability to access the funding required to commence construction.
However, the industry is broken and in need of innovation and change. I believe there is a better way. Change must start by empowering investors with the information and tools they need to make better-informed investment decisions.
Instead of spending millions of dollars trying to convince investors that our property was better than a property promoted by the agent next door, what if we invested the time and resources in educating people about how the market works?
Increasing knowledge and transparency can reduce market friction and create a market resembling the stock market, where all investors have equal access to information, rather than just a privileged few.
With their new knowledge, investors would have the confidence to make better, quicker, more fully informed decisions. Better information would change the requirement for marketing gimmicks and reduce the cost of promoting property, and everyone would win:
· Investors would pay a lot less, improving their yield and boosting their ability to meet their objectives more quickly;
· Developers would spend less on promoting property and would be willing to pass part of those savings on to investors; and
· Communities would not suffer from the massive property price inflation driven by excessive market costs, which ends up being blamed on investors.
At Colliers International, I was constantly asked questions by people within our company about how various elements of the new-build market worked. The more I thought about this, the more I realised a significant knowledge gap existed between what investors thought they knew and what they actually knew.
Perhaps surprisingly, with all the resources of a large property agency, even I found it challenging to get the correct information. More concerning was that most of the available information is either biased or covers small market elements.
The objectives of this book are to give you industry insights and an understanding of the basics of large-scale residential development; to show you how agents and developers determine marketing values and how marketing campaigns work; and to give you the tools and knowledge to create as much leverage as possible when negotiating to buy off-plan.
There are many books about real estate investment, but few focus on investment strategies in the off-plan market. Even fewer are written by those who have walked the walk. I am a successful portfolio investor and worked at the highest levels within the residential project marketing industry. I want to give you the insights, knowledge, and ability to make informed investment decisions. My overall aim is to help you to Analyse, Invest, and Prosper.
I have noticed several different things about the winners and the losers in the off-plan property market in my career.
It was the losers who always seemed to buy a property with the herd. They bought late in a marketing campaign or late in the market cycle. They paid 20% more for the property than the winners. They did not give deep thought to the market or what they were buying. They just followed a sense that values would always be going up.
These investors believed the ‘research’ produced by large property agencies. Have you ever noticed that this research always seems to suggest that now is an excellent time to buy? No matter how bleak things look in the economy, the research always seems to find hidden diamonds in the rough which will, it is claimed, buck the trend.
When these new buyers tried to let their new property, they soon found out that it would not rent for what they had been promised. Not only was there not a queue of merchant bankers and doctors wishing to rent their flat, but the rents were about 20% less than expected.
The investment winners were different. They were sceptical and had formed their own views. They always had a sense of reality and knew when the right time was to buy.
These investors had some key things in common:
· Access to high-quality market information: Large property agencies thrive on making market data challenging to obtain. But how can you make a sound investment decision if you don't understand what a good deal is?
· An understanding of the fatal error of paying today for tomorrow's growth: As an investor, you need to be cognisant of what today's reality is and what risk you are taking. Most importantly, you need to know how you will share in the risk/reward equation.
· An uncanny sense of the cost of excessive marketing campaigns: Market access costs are the enemy of both investors and developers. Expensive brochures and substantial marketing campaigns are excellent ways for large agencies to increase their profile and line the pockets of those in the media industry. However, they serve no real purpose. They simply increase the cost of the property and ultimately dilute returns for investors.
· A well-thought-out plan for buying and when they would get the maximum purchasing power from their capital: Most investors do not have a plan. They buy real estate simply because it seems like a sensible thing to do – and often it is. But why are they buying, and to what end? Is it a long-term investment, or is it part of a broader plan to develop a portfolio? Are they buying for yield or capital appreciation? How should the property be owned? At what point in the development and market cycles is the right time to buy? These are essential questions that you must have the answers to before signing on the dotted line.
· Strong networks: These successful investors were in the market, and people in the property market knew who they were. That does not mean they were constantly buying – just that they had their fingers on the pulse. They understood that the most cost-effective way to purchase real estate is not via the open market. And the only way that they could avoid the open market is if the people in the market selling property knew who they were and how to contact them. The agents knew that they could go to these people early in the sales and marketing campaign (when the best deals get done) and sell to these people quickly and quietly because they knew they would buy – at the right price!
· Clever ways of buying a lot of property at once: This is the most important factor. The investment winners got their friends and networks to pool together and leverage the economies of scale they could create. As a developer or as an agent, there is nothing better than de-risking your marketing expenses by doing early deals, especially if they are large, even if this means you need to agree a considerable discount.
I have developed these investor behaviours into 6 Investment Principles, which all successful investors follow in their buying and market activities:
1. Have a plan: They have a clear plan for why they are purchasing a particular property and how it fits into their long-term strategy. This plan empowers them in negotiations as they understand the impact of a decision on their plan, and more importantly when to say no to a deal.
2. Get market information: They have access to high-quality market data and make decisions based on economic reality rather than the highly biased property agency research reports.
3. Have a network: They have strong professional relationships and networks, they nurture them over many years, and they use them as a sounding board to sense check decisions.
4. Understand mis-priced risk: They have a detailed understanding of how the development cycle works, and more importantly, where the pain points are for developers; they leverage these to create win/win deals where they will have a better share in the risk and reward equation.
5. Recognise excessive market access costs: They understand the actual cost of overly expensive sales and marketing campaigns. They do not buy via these, because they realise who ultimately pays for them – the purchaser.
6. Buy in bulk: They find clever ways to leverage economies of scale created through buying in bulk. This may be easier to do than you first imagine.
How this book works
This book has five parts, each designed to take you through the off-plan property market and to help you develop your own property investment strategy. At the start of each part, I set out the key considerations. In order not to overwhelm you with information, each has its own chapter. At the end of each part, a recap crystallises the significant takeaways. The structure is as follows:
· Part 1: New-build Market Fundamentals: What are the fundamental principles behind the new-build property market? How does residential property development work?
· Part 2: Purchase Price and Costs: How are properties priced, and how do you get to the bottom of how to consider purchasing costs?
· Part 3: Purchase and Operational Considerations: What should you be thinking about when you purchase property, both today and from an operational perspective?
· Part 4A: Financial Performance: How do you measure and compare the potential financial performance of different investments?
· Part 4B: Driving Financial Performance: How do you improve the financial performance of your investment?
· Part 5: Your Property Investment Strategy: How do you bring all this information together to put together your investment strategy?
In the book, I have focused on the apartment market rather than houses. The simple reason for this is that my opinion, buying apartments makes more sense for most first-time investors.
Throughout this book, I have referenced the following fictional example, based on real life, to give you a true sense of how the market operates.
Metropolis is a real town, but for obvious reasons I have changed some of the details. I have referred to Metropolis throughout the book to put different scenarios into context.
After many years of being seen as a bad part of London, Metropolis is currently undergoing urban renewal. The catalyst for this was the economic growth experienced by many of its neighbouring suburbs. Metropolis has not experienced as much regeneration as its neighbours because it had a run-down housing estate (Metropolis Estate), which has always been considered rough. Recently, a prominent developer has purchased the Metropolis Estate with a plan to redevelop it.
Metropolis is five miles northwest of Oxford Street. It has a busy local high street as well as a London Underground Station. Adjacent to the Metropolis Estate is a parcel of land available for a new residential property, Kingsley Tower. I have used Kingsley Tower as an example throughout the book.
I have used two developers to highlight how different developers view different scenarios.
Ashley's Homes is a private developer run by two brothers, Kingsley and Alfred. Ashley's Homes are local in Metropolis and typically build complex buildings of up to 250 units. They have a small management team and some key staff. They always act as developer, and outsource most of their work - including planning, construction, and sales.
Alfred and Kingsley use their own capital to purchase land and then use construction finance to fund the development. When they do not have enough money to buy land, they can call upon a group of investment partners to invest in their development projects.
Osborne Corporation is a prominent, listed developer; it employs 20,000 staff across the United Kingdom. Osborne Corporation comprises 30 business units, each with its own independent management team led by a managing director. Osborne Corporation is listed on the London Stock Exchange, and it develops 20,000 homes a year across the UK. Osborne Corporation has its own construction staff; in some scenarios it self-builds with these in-house staff, while in others it appoints a main contractor to build the development.
Osborne Corporation uses its shareholder funds and debt to fund its business and developments. Capital for development is allocated to managing directors on a project-specific basis. When a managing director wants to undertake a project, they submit a standard pro forma document to the Board of directors. The CEO and CFO decide which development projects they would like to proceed with, and allocate the required level of capital to the managing director.
I have presented a potential purchase in Kingsley Tower from the perspective of two buyers: one investing onshore, and one offshore:
· Buyer 1: An investor in the UK who earns £50,000 per year and is buying an investment property to rent out; and
· Buyer 2: An investor who does not live in the United Kingdom and generates no other income in the United Kingdom from any additional investment(s).
I have explained what the cash flow and tax implications are from owning an investment property.
I have also set out how that investment would change if Kingsley Tower were in Australia or New Zealand. I have adjusted the currencies to make similar comparisons, so the investment can be compared across different tax brackets.
I have used Australia, New Zealand, and the United Kingdom in my comparison, for multiple reasons:
· Income tax rates: The income tax rates and the effective tax rates for someone earning £50,000 p.a. or the equivalents in Australia and New Zealand are similar.
Table I.1: Effective income tax rate
Australia New Zealand United Kingdom
Annual Salary $AUD 100,000 $NZD 100,000 £50,000
Income Tax $AUD 22,967 $NZD 23,920 £12,366*
Net Take Home Pay $AUD 77,033 $NZD 76,080 £37,634
Effective Tax Rate 22.97% 23.92% 24.72%
* includes National Insurance
· Residential real estate markets: The market dynamics of the three countries’ real estate markets are similar. They all have established rental markets, and similar laws.
Table I.2: Residential real estate markets
Australia New Zealand United Kingdom Levels of Home Ownership 65.5% 63.2% 63.5%
(Major Capital City) 3.97% 3.86% 2 – 6%
Estimated Annual New Housing Requirement
(Major Capital City) 41,200 p.a. 10,000 p.a. 66,000 p.a.
· Real estate taxes: Australia, New Zealand, and the UK differ significantly in their taxes for real estate investment and ownership. They therefore provide a great example of how tax treatment affects the net returns derived from an investment, and how this can inform your investment strategy.
Table I.3: Real estate taxes
Australia Domestic Investors
Low cost for ownership and long-term hold
High purchase taxes and lower taxes for long-term investment
New Zealand Domestic Investors
United Kingdom Domestic Investors
Moderate cost for purchase, average tax costs to sell, and expensive to hold from an income tax perspective
Moderate cost to purchase, average tax costs to sell, and expensive to hold from an income tax perspective
Whether a country has low or high real estate taxes for a specific market function is not necessarily an issue in itself. However, it is crucial to understand what real estate taxes are in order to design your investment strategy with them in mind.
Throughout this book, I go through each of the different real estate taxes as they relate to property investment in a market context, and give you strategies to deal with different scenarios.
Alongside this book, I provide online content. I maintain a series of country and investment guides that provide information on more than just Australia, New Zealand, and the UK, the countries which form the focus of this book. These guides are FREE, and are available in my investor library alongside my regular blogs at: www.proptechpioneer.com