At the beginning of the year we saw investors rushing to buy properties off-plan before the implementation of the new stamp duties. The new 5% tax for buyers acquiring a second residential property and a 10% tax for buyers acquiring a third property or more came into effect in February.
Buying properties off-plan is nothing new in Macau, and scenes of agents and buyers rushing around on launch day are often seen on the media. Is it a good idea to buy properties off-plan? Like many property questions, the answer is ‘it depends’. Let’s look at some pros and cons.
You have more time to prepare. After putting down your initial deposit (usually 10%) to secure the property with the developer, you have some time to get the money together for the second installment whilst the property is being built .
You lock in the price against the potential upside. When you put down your initial deposit you lock in today’s price for the property, and by the time it’s completed and you are handed the keys, the property price may have already appreciated in price (or not).
Leverage. Your deposit money is a small portion of the value of the property, but any increase in the value of the property is of course on the whole property. Thus, a property rising just 20% after your initial 10% deposit equates to a 200% paper return on your investment.
Once completed, you could charge premium rents. Everybody likes a new and shiny building, and because new buildings tend to have better facilities you can normally charge rents at a premium.
The development might not actually get built. Whether it’s the developer going bankrupt, running into a corruption scandal (sound familiar?) or denied necessary permits by the government, there is an element of risk you can’t ignore.
Construction is delayed. Engineering set-backs are not only common, but they’re almost expected. This means that your capital is tied up for a longer period and you might get a free ride on an emotional rollercoaster.
Leverage. Your deposit money is a small portion of the value of the property, but any decrease in the value of the property is of course on the whole property. Thus, a property falling just 20% after your initial 10% deposit equates to a 200% paper loss on your investment.
Off-plan properties are brand new and highly standardized so there is little to no room for you to add value as an investor. This makes the purchase much more speculative from an investment perspective.
Obviously this is food for thought when purchasing properties off- plan. There are other proven ways to invest, many of which remove the element of gambling and provide a long-term wealth building strategy.
Sam Lee is a marketing manager and property consultant at JML Property. JML was established in 1994 and offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.