Off-plan property investments fail to pay off

Overseas investors who put down deposits as high as 80% on property developments in northern cities such as Liverpool have been left struggling to get their money back when the buildings failed to materialise.

You may well shudder at the idea of handing over 80% of the price of a buy-to-let before anything has been built. Yet this is a fairly established model known as "buyer-funded" development, or "investor-led fractional sales". It puts the financial burden on the end-buyer rather than the developer.

The approach became popular after banks became less keen to fund property development in the wake of the financial crisis. Normally when buying off-plan you'd be expected to put up just a 10% deposit, which is then released to the developer when the property is finished.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

These schemes were fairly common in the north of England a few years ago, around the time that the government was selling the idea of a "Northern Powerhouse" to attract overseas investment from countries such as China. The projects promised investors, often from overseas, generous interest on their deposit (say, 6%), as well as guaranteed rental income (say, 9%) once the property was let. Yet many projects were never completed, with developers collapsing. "Abandoned or stalled buyer-funded housing projects are littered across Liverpool," says Louisa Clarence-Smith in The Times. Investors are left with nothing but "a Land Registry number and a block of fresh air", Louise Brittain of accountants Wilkins Kennedy told Clarence-Smith. Up to £500m in deposits could have gone missing in northern England.

Projects that overpromised

This is a valuable lesson for anyone tempted by high-yielding property investments. Although some of the affected investors were in the UK, many were based overseas. Ultimately, it can be risky to invest directly in off-plan property from afar, as you are both physically removed from the site and also from the ins and outs of how things are usually done in the property market there.

The yields on offer here were understandably appealing, but it's not too much of a surprise that they ended up being too good to be true. Be wary of such lofty promises, even if projects have some association with a government push for investment. And don't go anywhere near a project that asks for such a large proportion of the price upfront: this is invariably going to prove a risky investment.

Leaving it all behind

Do you think a private island is miles out of your price range? You may be wrong. Just two weeks ago, this page featured an 80-acre island off the cost of Galway that was on sale for £1.1m. However, while you might be able to buy an island for the price of a smallish family house in London, it's a complicated process. Below we set out some things you should think about if you're considering setting up on your own.

First, be aware that the ease of the process will depend on where you buy. Purchases in much of the Caribbean are governed by British law, making transactions relatively straightforward, while in Thailand and other parts of Asia freehold islands are rare, and foreigners are often barred from owning land, as George Hammond points out in the Financial Times. Look also into building permits you might need, as well as your legal rights if you're not a citizen of the state the island is in.

How will people get to you? "Some islands are so remote you'll need your own form of transport, such as a private plane or boat, to get there...You'll also need plans for inclement weather and an Agatha Christie-type on hand in case of an "And Then There Were None-level whodunnit," says Lilit Marcus on cnn.com. Consider the distance to the nearest hospital too.

Shipping materials from the mainland can push up building costs sharply, warns Hammond. "What might be $3,000 per square metre on the mainland is double that on an island," estate agent Marcus Gondolo-Gordon tells Hammond.

Think beyond the upfront costs. Power, water and accommodations (guest and staff) are big expenses, Stacy Fischer-Rosenthal of travel company Fischer Travel Enterprises tells Lilit Marcus.

Finally, you might want to try before you buy. "We recommend everyone interested in buying an island rents one in the same area for a week first," German estate agent Vladi Private Islands told The Independent in 2016.