Off-plan property sales as an innovative financing option in real estate development

Abstract

Real estate development is fraught with many uncertainties leading to serious shortages particularly of affordable housing for the majority of urban population. As a consequence, development developed a fairly innovative financing strategy – off plan sales. The strategy has emerged as an alternative source of finance, presenting developers with a chance to obtain funds from would-be buyers of the units in their proposed development. In spite of the huge significance of off-plan property sales and its growing popularity in the global platform, there is limited knowledge in this strategy as a financing option. The paper aims at sought to determining the challenges and constraints of off-plan property sales, as a financing strategy to the developers and as an investment to the property buyers and recommending appropriate mechanisms of enhancing it. Data was collected through a combination of different tools including questionnaires and key informant interviews. The study established that off-plan sales is an effective mode of financing real estate development since it generates significant savings on the cost of development, mainly through savings on interest to the tune of between 4% - 8.5% of the total cost of development. In the end, it emerged that the success of financing through off plan sales requires among others: establishment of an optimal mix in financing options; careful planning; early and vigorous marketing of the development; pre-qualification of potential off-plan buyers; the need for due diligence by buyers prior to purchase of the off-plan units; and the need for legal framework regulating off-plan sales.