Is it time to regulate on-plan property sales?

Property stakeholders are calling for the “fair regulation” of on-plan real estate, arguing that the sale of properties prior to their completion leaves property buyers hoping for a bargain subject to a number of risks that may lead to a financial loss.

Audit and advisory firm KPMG delved into the issue of on-plan sales in its Construction Industry and Property Market Report 2023, holding interviews with a variety of stakeholders including developers, contractors, real estate agents, representatives from major banking institutions, and other professionals involved in the field, such as architects and notaries.

The report acknowledges that such transactions tend to fulfil the needs of both the vendor and the buyer.

For property developers, on-plan sales can be an important source of finance, particularly for small and upcoming ones for whom bank or bond financing proves difficult.

Buyers meanwhile benefit from the opportunity to acquire a property at a discounted rate, so long as they can afford to wait for the property to be developed.

What sounds good in theory, however, does not always materialise in practice, with the lack of regulation targeting specifically on-plan transactions exposing potential buyers to a degree of financial risk.

The stakeholders interviewed noted that unforeseen discrepancies or delays are not uncommon when developing property. It is common practice for the contract between the buyer and the seller to include a provision binding the developer to return the deposit paid should they be unable to fulfil the contract’s original terms due to such delays or discrepancies.

However, given the lapse of time between the original promise of sale agreement and the finalisation of the property, the prospective buyer would have lost out on the financial return generally arising from the capital appreciation of the property.

Meanwhile, the developer would have essentially benefitted from using the prospective buyers’ funds interest free.

Adding to the headache for the prospective buyer, they may find that the returned deposit amount is insufficient to place a deposit on another property, which would have appreciated in the meantime.

Many of the established developers interviewed by KMPG commented that they avoid selling on plan, both to avoid the problems that arise from discrepancies and delays which may be out of their control, and to maximise their project’s financial returns.

The lack of regulation is also sometimes taken as an invitation by unethical operators who divert the buyer’s deposit to another project, leaving the one the buyer hopes to eventually receive underfunded and at risk of being left incomplete.

Cases of outright fraud have also been reported, with rogue individuals entirely misappropriated buyers’ funds – with financially vulnerable individuals often the most at risk to fall prey to such schemes. Such incidents also give a bad name to industry operators overall, said property stakeholders.

The common view among property stakeholders was therefore to introduce “fair regulation that allows for adequate potential buyer protection while simultaneously permitting developers to use the customers’ funds for development”. Incidents involving fraud give a bad name to industry operators overall.

Ending the section with its own view, KPMG said that on-plan sales stand to benefit from the introduction of a set of specially targeted regulations.

Such regulations could include, it said, standard general terms, penalties due for delays and discrepancies, and the extent to which prospective buyers would be due interest on any returned funds.

It also called for information about a prospective developer’s track record to be collected and made easily available to help buyers in their decisions.

Finally, prospective buyers should be able to receive adequate guidance before signing the promise of sale agreement, with timely recourse provided in the event of issues with the transaction.