By Daniel KONTIE
In our previous article “Breaking the 90/10 Syndrome in Residential Real Estate Development in Ghana”, the concept of Off-plan Development Model was mentioned as one of the key recommendations that investors could use to acquire decent properties for either personal use or for investment purposes.
Today, we are treating off-plan as a full topic, but before I go into the intricacies of this all important subject, let me first recommend that you subscribe to the Business & Financial Times Newspaper (B&FT), Africa’s leading Business and Financial Media platform.
This will keep you posted on new industry trends as you follow and read our articles in the “Construction & Real Estate Digest”, whilst taking advantage of other equally resourceful business and investment information for your personal growth. But before I proceed, let me state this for the avoidance of ambiguity and for purposes of clarity that, the term “developer” used in this article does not refer to GREDA members but derives its meaning and interpretation from the Ghana Building Regulation, Regulation 2022, (LI 2465) which defines a developer as “an individual (natural persons) or entities (corporate bodies) that work with land or real estate”.
It is important to set this record straight to avoid spurious interpretations which may not have been contemplated by the writer. This is because the information we work with goes beyond GREDA members. Also note that, the terms “buyer” and “investor” are used interchangeably which refers to individuals or corporate persons engaging in real estate transactions for commercial purposes.
Now, coming back to the substance of our discussion, what then is the Off-plan Development Model?. It is a real estate development or financing model where a developer sells properties at discounted prices to prospective buyers before the properties are developed.
The properties are most often marketed using brochures, 3D renderings, virtual impressions etc. The concept is such that the developer allocates the land or work-in-progress of the property to the prospective buyer together with an agreed flexible payment plan and a project delivery schedule. So as the buyer is making the installment payment, the developer develops the property for as long as it may take to complete depending on the agreement between the two.
The model though difficult to attribute its origination to any specific individual, available literature reveals that, it has its root from the United Arab Emirates (UEA) in the 1980s where it was used to finance large-scale real estate projects. The model gained popularity in the 2000s as it allows developers to secure funding for projects without relying on the traditional bank financing.
Today, off-plan development model is widely used across the globe in jurisdictions such as Dubai, London and New York, where the demand for properties often outpaces the available supply from luxury residential properties to large-scale commercial developments.
It is also heartwarming to announce that, the concept has gained root not only in Ghana in the African continent but also in Nigeria and other African countries, putting shelter over the heads of many in a dispensation where skyrocketing property prices becomes the order of the day.
In the Ghanaian context, the field and historical information we gathered between the year 2000 to 2023 suggests that, many of the real estate developers used this concept to grow into the big brands we know in the real estate space today.
I would have loved to mention a few empirical Ghanaian success stories in this regard, but will let it slide for want of time and space. But it is important to say this on authority that, many of the millionaire Ghanaian developers are products of the Off-plan Development Model until its abuse in recent times.
The purpose of this article is to explore this profound concept with special focus on the key the opportunity it presents, the challenges or risks factors associated with it and to offer recommendations to stakeholders, starting with the opportunities the Off-plan Development Model presents.
Opportunities of the Off-plan Development Model
Just like all other models, the off-plan development model presents opportunities to all stakeholders same as it does with its challenges.
Developers
The off-plan development model offers several opportunities to developers, principal among these are one, Capital Financing; with this concept, developers are able use the early-bird sales concept and the discounted pricing strategy that often comes with the off-plan model to secure funding by selling units before construction is completed.
This provides them with the capital needed to fund the project, eliminating the reliance on bank credit facilities or other financing methods that often come with huge cost of borrowing.
Apart from this, developers enjoy considerable Risk Mitigation that may have been caused as a result of unsold inventory. This is made possible because it offers them the opportunity to gauge market demands to adjust strategies that reflects current market needs as the development progresses over time. Moreover, the developer has higher chances of raking-in huge returns on investment (ROI) or increased profitability selling off-plan properties at premium prices compared to post-construction sales.
Buyers or Investors
Buyers enjoy concessionary purchase prices because, off-plan properties are often sold below market rates compared to completed properties. Apart from this, buyers enjoy flexible payment plans over an extended period of time that eases pressure on their finances. Investors also take advantage of these discounted price offerings to acquire many units as investment to avoid the negative effect of cash depreciation as liquid cash depreciates faster compared to landed properties.
In addition, buyers have the flexibility to customize or make modifications to the property as the construction work progresses: This enables the buyers to choose finishes, layouts, design features etc, allowing them to personalize their property to suit their current or future needs or both as may be dictated by modern or market demand, before the property is completed.
Also, the model offers buyers the opportunity to enjoy capital appreciation on the property as the construction progresses. The market value of off-plan properties may rise significantly which most often is the case. Buyers therefore benefit from capital gains by purchasing a property at a discounted price and seeing its value appreciate reasonably at the time the project is completed.
Major Challenges or Risks Associated with the Off-Plan Model
Having known the opportunities this model presents, it is also important to be mindful of the risks associated with it;
Developers
Construction delays are common with off-plan. It may be as a result of general economic recession making buyers unable to honor their payment obligations according to plan or it may be as a result of the developer diverting funds into other projects at the expense of buyers.
This may cause significant delays that can cause dissatisfaction among buyers. If construction takes longer than expected, developers may lose interest as a result of price increases in building materials that may have occurred over the construction period.
Another risk developers assume with this model worth mentioning is inflation on their revenue overtime if it is not hedged. In attempt to address this, property prices may be quoted in US Dollars or better still slab interest charges on the price over the construction period. If this is not well managed, the developer risk losing his investment and may not even be able to deliver the properties according to schedule.
Even in instances that buyers agree to the inflation hedging interest payment, chances are that, many of them will later get worn out on the burden of interest payment and may consider pulling out of the agreement.
On the flipside is the developer waving the inflation hedging charges, quoting the property price in local currency, giving relief to buyers and watch the value of his revenue being eroded by inflation over time and packing him out of business.
This is what many Ghanaian off-plan developers got wrong from the onset, which led to the collapse of their real estate businesses. They did not only fail to hedge their revenues forgetting that the Ghanaian economy is a very volatile one.
Apart from this, many of them diverted buyer’s funds into illiquid huge land investments whilst others engaged in the acquisition of ostentatious assets and get rich-quick-investment instruments for self-aggrandizement. A classic example is the defunct MenzGold Ponzi Scheme that fizzled out in 2018 with huge sums of people’s money, among which many real estate developers were victims.
Our market survey and analysis of developer data shows that, not less than 10 real estate developers (investors) who started with off-plan or adopted off-plan along the line folded up in the last ten (10) years with several others plateaued and predisposed to imminent collapse any time soon.
In fact, the few ones that failed recently between the 2019 and 2023 attributed the failure to the impact of the novel covid-19 pandemic, but that is not the whole truth, Covid-19 only came to exposed their fragility as many had collapsed already, yet were still doing window-dressing and cooking the books just to impress prospective buyers and the general public.
Buyers or Investors
As mentioned earlier, the possibility that the development may not be completed at all due to financial difficulties, lack of funding or other unforeseen circumstances is extremely high. Buyers stand the risk of having their funds misappropriated buy developers and may end up losing their hard-earned investment.
This non-completion may have been caused either by buyer’s inability to pay their installment diligently or the developer misapplying funds as mentioned earlier.
In extreme cases, this may result in the buyer losing their deposit and the property altogether. Another one is changes in market value of the property. While off-plan properties often appreciate in value, there is no guarantee particularly in some jurisdictions. If the local property market suffers a downturn, buyers may face the possibility of purchasing a property at a price higher than its current market value upon completion.
The other challenge is the uncertainty in the final product. While off-plan properties are marketed with 3D designs and visual impressions, there can be significant unexpected discrepancies between the design impressions sold to the buyer and the final product. This can leave many buyers disappointed if the finished property does not match the expectations set by the developer.
Finally, both developers and buyers face imminent liquidity risks because off-plan properties are not liquid investments. If a developer or a buyer wants to sell the property before it is completed, they may find it difficult to get a buyer willing to pay a price that reflects the appreciation expected upon completion. The likely resultant effect under the circumstance may lead to both parties making significant loses or end up in a legal stalemate.
Recommendations
In conclusion, one would ask, is the Off-Plan Development Model really viable?. The answer is in the affirmative as it has proven to be a valuable tool for property developers, investors, and homebuyers, particularly in rapidly developing real estate markets such as Ghana.
It is important to recommend that, all parties involved to carefully assess the risks before making decisions. Sometimes also, the lack of diligent supervision on the part of the buyers on developers poses a significant challenge. Diligent supervision puts developers on their toes and this prevents the diversification of buyer’s funds into other projects outside the arrangements.
Parties involved may also consider a medium to short term for project completion timeline, this will protect them from the impact of fluctuating building material prices or better still agree on risk sharing strategies.
Also, parties can agree on the bulk purchases of building materials to be stored and used over longer period of time to mitigate the impact of material price hikes on the project delivery. Both parties should also consider a location that makes it easier to dispose off the property uncompleted in the event the need arises.
It is important to end our recommendations here as the rest remains our confidential and trade secrets. One can always pay for our services to learn more, but for the real estate market in Ghana to continue thriving, it will be essential for all stakeholders (developers, investors, and buyers) to approach off-plan development with integrity and informed strategies, ensuring that it remains the viable and sustainable model in the long run as it has proven to be in other jurisdictions.
This is where the prospective buyer or developer has to seek technical counsel and this is where the expertise of the Africa Continental Engineering & Construction Network Ltd comes in. The Africa Continental Engineering & Construction Network is a consulting expert, designer and implementer of the off-plan development model in Ghana and Africa at large. We are currently executing our first off-plan project which has the potential of becoming the African most successful off-plan case study.
Mention is not yet made of the several off-plan projects we consulted on that have been successfully executed by our clients. The Off-plan Development Model is the only ideal solution to our housing crises if it is well designed and implemented. It can put decent shelter over the heads of the masses within the shortest possible time which naturally would have taken people a lifetime to do.
In summary, it is known to be the best model for new start-up developers or investors who do not really have the liquid cash to start their real estate business. It is also the only model that gives one the opportunity to use other people’s money to grow their real estate businesses.
Similarly, it is also the ideal model for buyers who do not have the lamp sum to make outright purchases for complete properties. However, it is important to add that the off-plan development model thrives on goodwill, integrity and track records, the reason is, one will have to be convinced that the developer has the capacity to deliver either by track records or by goodwill or both before anyone will entrust their hard earned income into their hands.
References
- Africa Continental Engineering and Construction Network (2024): Survey Report on Exploring Success Stories of Real Estate and Infrastructure Investment Financing Models.
- Wikipedia (2021): A guide to Real Estate Investment, Success case studies around the world – Report.
- Global Housing and Infrastructure Financing Models (2009): General Report, Global Real Estate and Infrastructure Report.
- African Development Bank (2015): Housing and Sustainable Infrastructure Financing Models.
- Building Regulation, Regulation 2022, (LI 2465) and Ghana Building Code (GS1207-2018).
