by Stephen McGee, Queensland State Manager
Every weekend when you open the newspaper you see a ridiculous number of new apartment projects and housing packages being marketed before building has even commenced.
As Brisbane’s most trusted independent buyer’s agency and investment strategist my office fields an amazing volume of telephone calls every week from developers/builders asking me to “push” these developments onto our investors clients. It would certainly add large amounts of money to my business accounts if were to push these “perfectly designed off the plan apartments” or “superbly built-brand new stock”. However, personally, I cherish the hours of sleep that I get knowing that we have always done the right thing by our clients when selecting investment grade properties.
What I also find upsetting is the number of calls we get from the owners who fell victim to the marketing schemes of these developers/spruikers when they signed up for some of these “perfectly designed” or “superbly built” projects and reality has fallen far short of high expectations.
The Pitch – Buying “off the plan”
Sugar coated promises are made to the potential buyer. Sign today and by the time settlement comes around your property value will have increased significantly. Achieving instant growth in equity for you, all whilst avoid paying loan interest and holding costs. Massive development incentives and stamp duty savings all sweeten the deal further. And the cherry on top you can rent it out immediately for income or flip it for a profit – all for the cost of a small deposit up front. Sounds perfect.
The Facts – “Too good to be true”
The streets are littered with buyers who have regretted their purchases and more often than not, the value of their property upon completion is significantly lower than what they actually paid. Granted, a few investors have made money buying Off the Plan but in my experience, that is not the norm.
So why are there so many buyers regretting their purchase? Is buying Off the Plan a good investment strategy? In my book NO.
Here are my 7 reasons why:
1. Inflated Prices due to Incentives
“Agents” are offered significant incentives to push these properties to clients but you – “the buyer” – are actually paying for these incentives that the developer feeds to third parties. This translates into an inflated sales price that is actually well over its true value.
What is also noteworthy is that on settlement you will also find that a pool of buyers can`t settle and will need to sell the property ASAP. This results in a “fire sale” and properties are mostly sold for whatever price they can achieve. This would then be regarded by the banks as the value on completion – not what you paid for it.
2. Difficulty in getting a loan
Considering most loan approvals only have a shelf life of approximately 90 days – getting a formal pre-approval for an Off the Plan purchase is a waste of time.
The underlying issue and one that is rarely spoken about is that the big 4 Australian banks won`t lend once their exposure cap has been reached. The banks have a policy restricting their exposure to 15% in any one building. If you bought an apartment in a building of 100 you may find securing a loan with one of the 4 big banks is difficult. For example, upon settlement, you submit your application – but if you are buyer #16 it is likely that your application will be declined or the bank may enforce a lower loan to value ratio (LVR) meaning you have to fund a larger deposit.
3. Uneven Owner Occupier spread
It’s a property fact that most off the plan apartments are sold to investors and very few are actually occupied by owners. This creates an imbalance in the investor/occupier ratio and can have negative impacts on the building overall. Generally, owner-occupiers will spend the money to maintain the building and improve its capital value whereas investor’s wallets are a lot less giving and they will often object to the body corps suggestions of spending on maintenance.
4. Oversupply – flooding the markets
Currently, there is a massive oversupply of new apartments in our major capital cities CBD’s especially Brisbane. This is contributing to a fall in prices which poses a problem for investors relying on the value of their property to increase by the time it reaches completion. Oversupply also creates a high level of competition between investors for tenants. Both of these events mean your investment will lack scarcity value, one of the main factors that I look for to help increase the value of any property.
Just recently on a Brisbane Current affair TV station it was broadcast how some investors who bought Off the Plan in a project have lost out to buyers who are now snapping up deals for completed apartments from the developers at hugely discounted pricing.
5. Rental guarantees inflating prices
Often developers will offer a rental guarantee to entice investors who might be more focused on their cash flow and worried about vacancies. The problem is you pay for these rental guarantees in the purchase price, which is another cost that inflates the apartments already premium price. And once the guarantee expires, the rental income reverts back to the going market rate which is usually lower than that offered in the guarantee.
6. Uncertainty of completion
Many of the Off the Plan projects recently marketed and sold in Brisbane won’t even get out off the ground. Some big players in the building world have actually on-sold their already DA approved unit sites in Brisbane for a loss rather than face the risk of building in what will probably still be an oversupplied volatile market?
What also has the potential of manifesting itself is that what you think you paid for you don’t always get. When a developer completes a project, it is not uncommon that amendments to the floor plans, finishes and fixtures have occurred. When this happens it is typically in their favour, not yours.
7. Low Land to Asset Ratios
I always tell my clients that they should always buy for value, not income. We know that land appreciates in value and buildings depreciate – so you should always buy with the highest land to asset value ratio possible.
This is often contrary to what developers build as they will always try to squeeze as many apartments as possible on the block resulting in a very low land to asset value ratio.
There are investors who have made money on the growth of their purchase during the generally 2-year construction phase but there are lower risk options available that will achieve the same returns more consistently.
If the new apartment market is still your investing appetite ensure you mitigate your risk and exposure when buying. You need to buy smart, we recommend new or established apartments in small boutique buildings or settings. Always aim for apartments with larger internal floor plans to maximize your land ratios. Being able to see a property without having to rely on artists impression gives you a true understanding of size, flow and fixtures and fittings.
And remember to negotiate hard for your apartment, developers need the money to get their projects off the ground!
Or better yet talk to National Property Buyers about how we can mitigate as much of the risk as possible in your property purchase.