131 Merivale Lane in Christchurch is an off-the-plan development undertaken by Williams Corporation.

Buy cheap, tidy up, add value. It’s a tried-and-true investment strategy, which for yearshas spelled success for New Zealand property investors. But with the perfect storm of vertiginoushouse price rises, changes to the Residential Tenancies Act (RTA), and the Healthy Homes regulation, many investors are looking for different ways to do business.

Off the plan doesn’t have the obvious appeal of buying a house that’s already built. It’s a slow process, with build times that can take years. A promise of a future house isn’t as exciting as real “bricks and mortar”: then there are the horror stories about developments that never eventuate.

Nevertheless, many of the country’s most experienced investors are rethinking off the plan and deciding to invest in an option that’s looking increasingly appealing.

Change Of Tack

Seasoned property investor Andrew Bruce never thought he’d go down the off-the-plan path. But changes to the RTA and a bad experience with the Tenancy Tribunal have led to a strategy reassessment.

Bruce has recently purchased “a couple” of off-the-plan terraces in Auckland. Since putting down a deposit in August 2020, he’s seen the value of the yet-to-be-built terraces move quickly upwards.

One of the main reasons for his change of attitude is the removal of the 90-day-notice for problematic tenants from the RTA.

“I’ve just sold a property [that commanded a low rent] after having huge issues with a tenant and problems with removing them via the tribunal process. I’m worried that it’s going to be impossible to remove difficult people [from low-cost rentals] and decided to invest in rentals that attract less risky tenants.”

The terraced townhouses that Bruce has invested in also make a lot of sense financially. In a city like Auckland, where you’d be hard pressed to find anything under $800,000, starting rates for one-bedroom off-theplan terraces can be under $700,000. And they can be secured for a small deposit (between 5-20%) which means you have more time to pay and earn capital gains.

In The Zone

If recent statistics are anything to go by, terraces, townhouses and apartments may be the way of the future in New Zealand. The most recent information from Statistics New Zealand (from January 2021) revealed a 5.8% yearon-year increase, with 3,025 consents granted. Over 50% of these consents (1,538) were for townhouses, flats, units or apartments.

Councils are changing zoning to address the ever-growing housing shortage, and developers are lapping up
properties with intensification potential. City suburbs that previously allowed for single dwellings on expansive sections are ringing with the sound of builders’ hammers as terraces take the place of the quarter acre dream.

Matthew Horncastle is the managing director of property development company Williams Corporation. They specialise in infill developments: buying old homes, removing them from sites, and creating high quality townhouses in their place.

He says that there has been asignificant increase in investor interest for his off-the-plan developments, located in Auckland, Wellington and Christchurch.

“There is a huge stock shortage in New Zealand, and for many people, buying off the plan is the only option,” he says.

He agrees that the changes to the RTA and the Healthy Homes requirements have underpinned a strategic shift for some investors.

“You are likely to get a better-quality tenant with a new build and you are able to enjoy great capital gains with a minimal deposit.”

Property prices are up 19% yearon- year (according to the most recent REINZ data) and industry pundits say
the trend is likely to continue for at least a few years. As new builds are exempt from the high LVRs banks are requiring of investors, off the plan offers a unique investing alternative.

“They could be particularly attractive for new investors, who are only looking at a 20% deposit rather than a 40% deposit, for their investment property,” says Bruce.

Focus On Infill

Barry Walker is the national sales and marketing manager for Keith Hay Homes. He says the company’s development arm has been working on infill and green fields developments for the past few years and started selling off the plan last year at the beginning of Covid-19 lockdown.

“We were offering off-the-plan homes for a development at Bulls and about a quarter of these sold at the beginning of lockdown. The homes started at $400,000 and since lockdown ended, they have risen in value by 25%.”

Keith Hay Homes are also undertaking a development in Rānui, West Auckland, with a starting price of around $850,000 for a 120m2 section with a 225m2 house. Walker says that the price expectations last year for the homes were $750,000, but the value has increased by $100,000 in the past 12 months.

Walker explains that the Unitary Plan in Auckland has added huge value to land, and that investors who would have bought cheap homes on chunks of land then renovated to add value no longer have that option. Terraces and townhouses are becoming increasingly popular both with owner-occupiers and investors.

“A few years ago, terraces andtownhouses would not sell in the cities, because people wanted the big section. But I think people are realising that this is going to be a way of life: if they want to live in the city and have an affordable home, the options are townhouses, terraces or apartments.”

He believes now is a great time for investors to get on board with off the plan and new builds, as the capital gains will increase for the next few years.

“Auckland is at the beginning of acomplete transformation, it’s going to be a city of terraces and townhouses. We are at the beginning of the cycle so there are great opportunities. The cities aren’t making more land.”

Risk Factors

As with any investments, there are risks to buying off the plan. Horncastle explains that people can find
themselves in trouble if they don’t do their homework.

“If you are working with the right people, buying off the plan can be a good idea. But people can get caught out. We know of people who have been left in limbo for years by no-name developers who are unable to complete the projects,” he says.

The sunset clause can also be used by unscrupulous investors to catch unwary buyers out. This clause allows for both parties to end the deal if homes aren’t finished by a set date: which can be good for both parties. But it can also be used by unscrupulous developers as a way in which to make more money.

Property developer and author David Whitburn says that he’s heard of cases in which buyers have been burned by these clauses. Development on the build stops, the sunset clause passes, the deal falls down. Then the developers relist the builds for a much higher price.

Whitburn advises potential off-theplan buyers to engage in due diligence before signing on the dotted line.

“Always do background checks ondevelopers who you are looking at buying from,” he says. “I know of one developer who is currently operating who has been declared bankrupt four times.”

Unscrupulous developers sometimes use others to front their new ventures, so digging is often required, he says. Property investor associations are great for advice, so ask around your local association for information that may save you thousands.

“Do some digging, search property files, get help from others to investigate the developer’s background,” he says.

Whitburn advises potential investors to look at the Companies Office website and establish who their shareholders are. Search for information on them; establish if they are honest and reputable. If you do your homework and work with a reputable developer, however, off the plan offers some great opportunities.

“You are buying at a fixed price, which is likely to increase in this market once the build is complete,” says Whitburn.

“But you really need to do your homework.”

Top Tips For Off The Plan

Matthew Horncastle from Williams Corporation gives his advice for buying off the plan.

1Reputation. Make sure you are dealing with a reputable developer with a track record. Development is extremely difficult and you want your investment property to be completed in a professional manner and to a high standard.

2 Sunset dates. These are your friend, you want this to be two-three years. Construction has many challenges and the market is usually increasing in value. If there are delays on site and the project takes two years the property has probably increased a lot in value and you want to benefit from that and not be rolled out of the contract.

3 Deposit. Do not give your deposit to the developer, make sure it is held in a lawyer’s trust account on behalf of the vendor and purchaser for the home to be completed as per contract.

4Weather. tightness and quality of construction. I am starting to see trends in the market where we are forgetting the basics of how to build a safe investment. Talk to your developer about what products they are using and why. Make sure they have an understanding of how to build a safe investment: avoid flat roof and internal gutters