Off-Plan Risk Premium

Off-plan risk premium is the additional expected return required to compensate investors for completion uncertainty, specification changes, and delayed possession in pre-construction purchases.

Risk ComponentsManifestation
Completion delayHandover 6 to 24 months late common
Developer defaultProject abandonment or bankruptcy
Specification changesFinal product differs from marketing
Market timing riskValues fall during construction period
Financing unavailabilityCannot secure mortgage at completion
Opportunity costCapital tied up without rental income
Required Risk PremiumTarget
Established developer15% to 25% discount to completed
Track record developer20% to 30% discount required
New or unproven developer30% to 40% discount necessary
Distressed or delayed project40%+ discount for acceptable risk
Premium justificationCompensates for 2 to 4 year hold without income
Expected IRRTarget 15% to 25% to justify off-plan risk


Related Terms

Developer RiskCompletion RiskRisk-Adjusted ReturnOff-Plan Investment

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