The investor can share the profit made on each development. While the developer will make the majority of this, investment opportunities at the very beginning of a project will typically yield a large return. This is because the developer will be drawing on their own funds at this stage, and the opportunity to use capital from elsewhere is attractive. In return for this, the developer will dilute their own profit share by offering a high return on funds provided at the start or at other key stages of the project.
Many existing funds that rely on property are based on commercial property, which is let. This can mean that liquidity of funds is low. A slowdown in the economic cycle and increased risks of operating (including corporate liquidations) would affect these funds more than a private international fund.
With off-plan developments, the developer places their own funds at risk first. In addition, demand is such in popular regions that the majority of sales often take place well before the development is finished. This reduces risk considerably - and the return of funding can take place early if off-plan sales are ahead of target and at a point, which guarantees an overall level of profitability.
While the developer may make a profit of several times the capital initially invested, an outside investor may easily be offered a transaction, which provides a rate of return well above general market rates. While other asset classes may typically generate investment returns in the range of 5-12%, the projected returns from carefully selected international property developments over an 18 to 36 month period would be expected to be in the range of 15% to 20%, averaged over the term.
The investment level in this kind of project is finite, and once the funds are raised the offer will generally close. To make the most of these investments, they should be seen as a medium to long term opportunity.
