Pros and Cons of Property Development
Development property Pros and Cons
Real estate development, or property development, is a business process encompassing activities that range from the renovation and re-leasing of existing buildings to the purchasing of land and the sale of developed land.
Development property is a property currently under development that has not achieved an occupancy rate of at least 80%, or on which the improvements (other than tenant improvements on unoccupied space) related to the development have not been completed.
With excellent returns on property investments and growing demand for housing in South Africa, it is no surprise that many people are choosing to invest in property development to help ensure their future financial security and increase their wealth.
Common types of development property?
House behind house
If you own a house on a large property, then a good property development option for you may be to divide your block in two and add another dwelling to it. A house behind house development gives you the opportunity to invest in a new home, whilst still keeping your current property.
Duplex
A duplex is a low-maintenance, dual-occupancy development that allows you to invest in the property development market in an uncomplicated and affordable manner. Duplexes consist of one building, on a single lot, which is divided into two dwellings that share a common wall.
Triplex
Triplexes are high-density unit developments that allow you to build three dwellings on a single site. Building a triplex is more complicated than building a duplex and it requires good planning, skills and expertise to ensure a successful venture.
Multi-units
Multi-units can consist of houses, townhouses, apartments and other units which usually share common facilities like parking areas or security. Building a multi-unit development may be very complex and costly, with many factors such as property divisions, drainage and sewerage to take into account. This type of development also usually requires more paperwork and permits from local authorities.
Pros:
Modernisation
New developments make provisions for the latest technology and enhancement. Things like fibre for your high-speed internet connection, alarm systems, soundproofing and insulation are taken into account and added to your property.
Financial savings
When you buy a development property, you'll enjoy savings on several expenses. You'll be exempt from transfer duty costs and the transaction expenses are paid for by the developer. Another financial advantage is that VAT is included in the selling price. You'll typically pay a 10% deposit with the rest of the money being due once the building is finished. When you purchase a house off-plan, the profits can be exempt from capital gains tax if the building is not finished yet.
Decreased repair work
Repair work costs you time and money. It's also a hassle when you move into your house and there's faulty wiring and broken fences to be fixed. When you purchase a development property, you'll enjoy a few years without having to consider maintenance.
Increased personalisation options
Instead of moving into a house that was made for someone else years ago, you'll be able to enjoy a new home that's built to meet your requirements. You'll have the opportunity to get the size of the house exactly right and have a say in what finishes are used.
Better security
Development properties typically come with high levels of security. Key characteristics of these developments include controlled access and security guards. You'll have peace of mind knowing that your loved ones are safe.
Upkeep
Other properties around you are new and well maintained which has a positive effect on the value of your property. In addition, developments will usually have rules regarding building works, gardens, pets and conduct that everyone needs to abide by so that disputes with neighbours are kept to a minimum.
Cons:
Levy increases
If there are numerous unsold units, you may end up having to pay higher levies or a special levy may be implemented.
Plans may be different from a finished building
If buying off-plan you're typically shown an artist's impression of what the property will look like. The finished product may look somewhat different. Also, be aware of any buildings not included in the current plans which could affect your views.
Finishes may be different
The fixtures and fittings in the show house on the development may be different from those that you end up getting. Make sure that your contract specifies the fixtures and fittings that you will get and be aware of any clauses that allow the developer to use cheaper substitutes.
Lot Size
New homes are built on smaller lots than older homes. If you're looking for that big backyard - and lots of space between your house and the next-door neighbour's - you may not find it in a new build.
Building defects
It is a reality that most new buildings will have some defects or "snags". A reputable developer will ask you to draw up a list of defects and submit it to them within a certain time frame so that they can be attended to.
Some things to look for when drawing up a list of defects include:
- Straightness of the walls
- Taps, shower, bath and plumbing are in working order
- Cupboards correctly installed
- Hairline cracks in tiles and tiles neatly laid
- Stove in working order
- Silicon sealing in bathrooms and kitchen
- Plugs in working order
- Scratches, cracks or marks
How do you get maximum value from your development property?
If you've weighed up the pros and cons of buying a development property and decided that a new house is for you, here are a couple of final tips to help you get the most value from your property purchase.
Buy early
In order to maximize your profits through off-plan purchase, it is essential to buy early. Developers usually offer great deals at the start of a project and you need to take advantage of that. With steady growth in prices, your investment should also increase in value by the time the development is completed.
Buy the best units
The first investors in development have the opportunity to select the best properties and choice units. They will receive the highest capital appreciation in the shortest time. In addition, the best units command a higher rental income.
The developer's reputation
Buy from an established developer with a proven track record. Find out if the developer has completed other projects and check them out. Search online to check if the developer has had any bad press for work on other developments.
The above in a nutshell is what buying development property is all about. For anyone looking to enter this exciting yet challenging space, the simple advice is to start small and build from there.
Source: Private Property Report, 30 October 2020