Retirees buying off plan: risks and rewards

Buying off-plan is the norm for new residential estates, but it has proven to be not that popular in the retirement village market.

Buying off-plan

Buying off-plan essentially means buying a home that does not physically exist yet. This is probably the original crowdfunding initiative, and it’s a tried and tested way for developers to leverage confirmed sales to secure enough capital to build the necessary infrastructure.

The model is advantageous to the home owner too, especially from an investment point of view. Property values are likely to increases over the construction period, and so the very first off-plan buyers are likely to benefit the most, seeing the greatest appreciation as the development nears completion.

Off-plan buyers also save significantly in upfront costs, as a home purchased directly from the developer is exempt from transfer duty and VAT. And, of course, if the home has to be financed, buyers will only start paying the bond once construction is complete and transfer is finalised, giving them time to save up.

‘The life right model essentially allows “ownership” of property without the hassles of ownership such as costs of maintenance and upkeep,’ explains Leon Lochner from Rabie and Rabie Attorneys, Conveyancers and Notaries. ‘If you buy from a developer who sells the property or a life right for the first time, then you are protected by the Housing Development Scheme for Retired Persons Act,’ he says.

He goes on to explain that buying off-plan also gives home owners the flexibility to select finishes of their own choice, and make changes to design features to suit their own needs. A home owner also has greater options when it comes to choosing the type and style of their home, as well as its position within the development.

Retirees are reluctant to buy off-plan

The off-plan model sounds great on paper, but there are downfalls to purchasing off-plan, especially for older people. Buying into a retirement development is likely to be the last property purchase anyone will make, and no-one wants to make a mistake. One of the biggest turn-offs, especially for older people, is not being able to see the property, but most developers have solved this by building a show unit so that potential buyers can get a good feel for what the property will be like on completion.

While it’s not common, some developers have promised on-site amenities, and then not delivered – usually through lack of funding. One way of showing commitment to the market is by building the healthcare centre and other communal facilities first.

Retirees struggle to finance off-plan purchases

Older people find it hard to get a bond, as most financial institutions are loath to lend to people over 65. So most will have to sell their existing homes before they can purchase a life right unit. This, of course, makes buying off-plan difficult, as the purchaser needs to continue living in their original home until the new unit is ready for occupation.

This creates a challenge, not only for the potential purchaser, but also for the industry as a whole, because the off-plan model is crucial to the business plan. If people don’t buy off-plan, there will be a funding gap, and developers will be the first to feel the pinch.

The most obvious – and probably simplest – solution is to lower the age at which people can buy into retirement estates, and to make it an attractive investment by allowing life right owners to rent their units until they are ready to move in. Of course, selling a life right to a 20-year-old comes with some long-term issues.

Challenges vs opportunities

But every challenge comes with an opportunity. It was in order to close this funding gap that Evergreen, the industry leader in life right, sold 50% of their business to the investment company PSG Group in 2017. It has proven to be a match made in heaven. Evergreen is going ahead with its rollout of life right properties, and PSG Group has made a smart investment. At PSG’s 2018 AGM, Group CEO Piet Mouton emphasised the positive nature of the transaction, saying: ‘I don’t think we’ve ever made an investment that has hit the ground running as hard as Evergreen.’

Another way to deal with this challenge is to change the financing model. Shoreline Sibaya, for example, has committed to proactively assisting with funding off-plan purchases for retirees. Using the purchaser’s existing home as security, they will lend them sufficient to cover any necessary down payments for a total interest of 3%.

Outside of the property sector, banks and other financial institutions are also beginning to come to the table. Capitec Bank is one of the first banks in the country to offer unsecured loans to customers over 70. The requirements are a guaranteed monthly income, either from a pension or some other investment, and a good credit record.

Small steps and slow progress, but change is definitely happening and rightfully so. The off-plan model is a central component of the property market, and it may well be the norm in the life right market in the near future.