The idea of funding a development by selling off-plan to keen investors is a good one. Why not, if you cannot secure funding elsewhere? Equally effective in securing funds, but far less appealing to your investors, is having little, or no, intention of completing the development. 2017 saw a number of such schemes hit the headlines, so what exactly are buyer-funded developments and what went wrong for investors?
How do the schemes work?
Investment in development has long been viewed as risky: funding through to completion is not always identified at the outset and if funds run out before a development is complete, there are few viable options and developments can flounder. What was challenging before has become even more difficult since the financial crisis of 2008 and developers have found it increasingly difficult to secure funding through traditional arrangements with banks and institutional lenders.
It should not really come as a surprise, therefore, that developers have sought alternative funding mechanisms and it has become increasingly popular to sell units off-plan for substantial deposits – frequently up to 80% of the full price. Investors’ money is ostensibly to be used to fund the project from start to finish – construction costs right through to marketing fees.
What happens when it all goes wrong?
In theory, it is a great solution to a difficult problem. But why has it gone wrong? The Guardian reported in March that “more than a dozen property schemes in the north of England…have either stalled indefinitely or collapsed outright”. Liverpool and Manchester have been particularly hard hit. Money has been taken – and apparently spent – but the promised units have not been delivered.