6 points to consider when comparing operational property with off-plan
It’s always said that commercial property is judged solely on its ability to generate regular income.
So, it’s easy to see why the ‘operational’ option would be instantly appealing to the investor; an existing property with a proven track record of rental yields - what’s not to like?
But that CGI of an as yet unbuilt development is worthy of serious consideration too.
First of all, what type of commercial property is it?
‘Commercial’ doesn’t necessarily mean a shop, an office or a unit on an industrial estate.
It could also be purpose built student accommodation, or a serviced apartment. There is a considerable undersupply of both these types of property - a conscientious developer will have done in-depth research and comprehensive due diligence to ensure that any proposed construction will benefit from long-term demand.
So, investing in an off-plan project in a handpicked location should be no riskier than a tried and tested, fully-tenanted property.
Is the off-plan property covered by a warranty?
Of course, you’ll need an independent 10-year warranty which covers build completion and structural quality – do make sure this is included as standard.
Although warranties are a requirement for residential new builds, many developers use the excuse that they aren’t mandatory for such commercial properties and therefore save themselves the expense and effort of attaining the necessary standards.
What else should off-plan offer you?
For a start, during the build you should be offered 5% interest on any deposit you’ve put down. There should also be independent sign-off of each stage of construction before any further payment becomes due.
Once completed, your off-plan investment should be a state-of-the-art property built to the most rigorous technical and environmental specifications.
The day it becomes operational, it should yield you a fixed, contracted NET income of 10% every year for 10 years.
What can you expect from an operational property?
As we’ve said, first and foremost you have the reassurance of the property’s previous performance; it gives you an insight into likely demand levels for the long term.
And because it’s up and running, you can always arrange to have a site visit and see your bricks and mortar in action before you commit.
It should certainly start earning you income from the day you exchange contracts. Ideally, you’ll have found a property which offers you contracted NET income for 10 years, starting at 8% rising to 9% in year 3 and 10% for the 6 years remaining.
What should they both deliver?
In the case of student accommodation, it should be as close to the university campus and city centre as possible. For serviced apartments, long-standing, consistent tourist appeal is a must. Both should have the very best communal and private facilities, and be furnished and decorated to the highest standards.
Whether new build or operational, for a truly effortless income you should ensure that your property will be professionally managed by an onsite team. They should undertake all vetting, letting, rent collection, maintenance, replacement and repair at no further charge to you whatsoever during your fixed income period.
Nor should there be any ground rent, service charges, utilities or insurance costs in that time.
You should have a long leasehold - at least 120 years - and your NET fixed income should be fully transferable to a new buyer.
Which will earn the most?
James Harrington, Business Development Manager at sector specialists Emerging Property observed “Of our portfolio, 18 developments are operational with a further two under construction. The difference in our clients’ incomes between off-plan and operational is infinitesimal; if you asked me to choose between the two I’d say there is no wrong option as long as you’re dealing with a reputable developer.”
Browse a selection of the UK's highest-yielding off-plan and operational student properties and serviced apartments, and see which property investment opportunity suits you best.