Off-plan Property in Gibraltar

Off-plan’s the right plan

In September, the entire development of 116 apartments sold in just six days. That’s £46m of property sold at an average rate of £7.7m per day. That is a phenomenal success story and a real confidence indicator of Gib PLC. Imperial Ocean Plaza, phase three of the Ocean Village resort development, proved popular with local and international investors alike.

I am confident that the speed with which this development sold is a new record for Gibraltar.

I recall the launch of phase one of Ocean Village, Royal Ocean Plaza, in 2003. 133 apartments sold within one month which I believe was a record at that time. Phase two launched in 2006 with a further 180 apartments, the sales period this time being around 5 weeks.

Back to 2014 and the ingredients were all there for a successful launch. Ocean Village is one of the most popular residential developments in Gibraltar due to its location, design and access to the attractive resort area of communal swimming pools and gardens. Pricing was attractive (but by no means giveaway) and our marketing was effective (we achieved a 13% response rate from our email mailout to our database). However, the main reason for such a result was the basic economic backdrop of demand easily outstripping supply for residential property and this situation has built up over the last, say, three years. September’s launch was the first significant off-plan launch of apartments for some 5 years and the release of a pressure valve.

It is clear to see why developers prefer off-plan. Property development is hugely expensive so the developers and their funding banks require some assurance that the units they are going to build will be sought-after by purchasers, be they buy to let investors or owner occupiers. Selling a property off-plan is one of the few ways of providing evidence and comfort to the bank that their loan finance is secure.

Perhaps the main attraction of buying off plan for purchasers is that it provides them with an opportunity to obtain property at (usually) a little below market price on payment of a deposit (usually 25% over the course of the development), with the majority of the purchase price being payable at completion at some future time. If the real estate market is experiencing growth (which it is at this current time) then the property purchased off plan may also rise in value by the time the property is ready to complete. The property may be sold on prior to completion and a profit made, or, the property is kept for occupation or rental. Off-plan purchasers also have the opportunity to buy the best units ahead of the rest, although in the case of Imperial, hardly anyone had time to blink an eyelid before they were all gone.

Off-plan property development has a near perfect track record for developers and investors in Gibraltar in recent times. Indeed, hardly any new property is sold other than off-plan these days. Yet there are theoretical risks and disadvantages.

Firstly, and perhaps the biggest disadvantage of buying off plan is a developer may be unable to proceed with the project within the time specified in the contract, which does make life difficult for potential owner occupier purchasers. Or the project may not proceed at all. This may occur because the developer is unable to obtain final planning consent or is unable to secure sufficient funding to finance the project. If this happens the developer may choose to cancel the contract (should the contract allow this).

Although a contract would normally provide for the return of a buyer’s deposit money in the event of a development not proceeding, a contract would not usually provide for payment of any other compensation. Importantly, even though a deposit may be refunded, the buyer may have lost the opportunity to purchase elsewhere in what may have been a rising real estate market.

Secondly. the use of purchaser deposits by the developer rightly comes under scrutiny. In the case of Imperial, the purchaser’s money is not released to the developer until the frame of the structure is built. This demonstrates that the developer has funded the land purchase and the first 25% or so of the build from his own funds (or the bank’s).

Thirdly, and despite the widely held belief that real estate property values always rise over time, they may not appreciate in value during the development period or could even depreciate in value. There is always a risk that the contract price for a property will be more than the market value at the time of settlement. The buyers of Imperial clearly have faith in the continuing growth of the Gibraltar market.

Finally, a contractor’s standard of work may not be as high as expected and a completed property may therefore fail to live up to a buyer’s expectations. People who buy off plan are often limited to viewing marketing material or a design concept provided by the developer, and may not get exactly what they expected. The advantage of selling a second and third phase of a project is that would be buyers can see for themselves the quality of design, construction and materials of the earlier phases so they have a benchmark.

Whatever the risks, purchasers clearly believed that Imperial Ocean Plaza off-plan was a worthy investment. So the question remains, is there room for more off-plan residential developments? In my opinion, absolutely yes. Chesterton’s growing list of interested parties for the next off-plan development in Gibraltar is testimony to this. 116 apartments hardly changes the demand and supply imbalance at all.

And from an agency point of view, we look forward to trying to beat a six day sale. In June this year, all 129 apartments in a residential development, Aqua in Bondi Junction (Sydney), sold out on launch day in just four hours. So that’s our target! Just make sure you register your interest for the next off-plan launch with Chesterton.