Disclaimer:
This article provides general information only and does not constitute financial, legal, tax, or investment advice. Property investment involves risk. Always do your own research and seek personalised advice from qualified professionals before making investment decisions.
Key Takeaways
- Off-the-plan purchases lock in today's price for a property delivered months or years later.
- Key risks include developer insolvency, valuation shortfalls, and market changes during construction.
- New builds may qualify for lower LVR requirements from some lenders.
- Sunset clauses can allow developers to cancel contracts if conditions are not met.
- Thorough due diligence on the developer and contract terms is essential.
Buying off the plan means purchasing a property before it is built, based on plans and specifications. For investors, this approach offers potential rewards but also carries unique risks that differ significantly from buying existing properties.
Off-the-plan purchases have become increasingly popular in New Zealand, particularly for apartments and townhouse developments in major cities. The appeal is clear: you can secure a property at today's price with a relatively small deposit, with settlement occurring when construction is complete.
The Potential Rewards
Capital Growth During Construction
In a rising market, you may benefit from capital growth between signing the contract and settlement. If you buy at $600,000 and the property is worth $680,000 when completed two years later, you have gained equity before even taking possession.
Lower LVR Requirements
Some lenders offer more favourable loan-to-value ratio treatment for qualifying new builds. Existing investment properties usually require a larger deposit, while some new builds may qualify for lower deposit requirements. Confirm the current treatment with your lender before signing.
New Building Benefits
New properties come with builder warranties, modern building standards, and compliance with healthy homes requirements from day one. Maintenance costs are typically lower in the early years, and the property may be more attractive to quality tenants.
The Significant Risks
Developer Insolvency
If the developer goes into liquidation before completing the project, you could lose your deposit and be left with nothing. While deposits are often held in trust, the protection varies depending on the contract terms and trust arrangement.
Developer Risk Factors to Check:
- Track record of completed developments
- Financial stability and backing
- Quality of previous builds
- References from past purchasers
- Whether they own the land or have conditional agreements
Valuation Shortfalls
The bank will value the property at settlement, not when you sign the contract. If the market has softened or similar units in the development have sold for less, the valuation may come in below your purchase price. This creates a funding gap you must cover.
For example, if you contracted at $650,000 but the bank values it at $600,000, you need to find an extra $50,000 to settle, on top of your planned deposit.
Market Changes
Property markets can shift significantly over a two or three year construction period. Interest rates may rise, making the investment less viable. Rental demand may change. Employment conditions may deteriorate. You are locked into a purchase based on conditions that existed years ago.
Sunset Clauses
Most off-the-plan contracts include sunset clauses that allow either party to cancel if certain conditions are not met by a specified date. While these protect buyers if the development stalls, they have historically been misused by developers to cancel contracts in rising markets and resell at higher prices.
Sunset Clause Protections
The Property Law Amendment Act 2015 (section 226) provides important protections for purchasers. Developers cannot exercise sunset clause cancellation rights in bad faith—for example, cancelling simply to resell at a higher price to another buyer. If a developer wrongfully cancels your contract to take advantage of rising prices, you can apply to the High Court for a vesting order. This court order can compel the developer to complete the sale to you at the original contract price, rather than allowing them to profit from the cancellation.
What You Actually Get
You are buying based on plans, artist impressions, and show homes. The finished product may differ from your expectations. Views may be blocked by neighbouring buildings, finishes may be lower quality than anticipated, and the overall feel of the development may disappoint.
Due Diligence for Off-the-Plan Purchases
Essential Checks Before Signing:
- Research the developer's history and financial stability
- Have a property lawyer review the contract thoroughly
- Understand exactly what is included in the purchase price
- Check deposit protection arrangements
- Review the sunset clause terms carefully
- Understand variation clauses and what changes the developer can make
- Get independent advice on likely rental returns and values
Financing Considerations
Getting finance pre-approval for an off-the-plan purchase requires a different approach than buying an existing property. The bank cannot fully assess the property until it exists, so pre-approval is often conditional on the completed property meeting certain criteria.
Be aware that your financial situation may change between signing and settlement. Job changes, other debt, or changes to lending policy could affect your ability to settle. Plan conservatively and maintain buffers.
Is Off-the-Plan Right for You?
Off-the-plan purchases suit investors who have a longer time horizon, can tolerate uncertainty, and have the financial flexibility to handle unexpected costs or valuation shortfalls. They may not suit those who need certainty or have tight financial margins.
Consider your portfolio strategy. If you are looking for immediate rental income or need to add value through renovation, existing properties may be more suitable. If you want a hands-off new build with modern specifications, and can wait for delivery, off-the-plan may fit your needs.
The Bottom Line
Off-the-plan purchases offer genuine opportunities for property investors, including potential capital growth during construction, lower deposit requirements, and brand new properties with modern amenities. However, the risks are substantial and different from buying existing property.
Success requires thorough due diligence, a quality legal review of the contract, financial buffers for unexpected issues, and careful selection of reputable developers. If you proceed with eyes open and appropriate caution, off-the-plan can be a viable addition to your investment strategy.