Off the plan apartments prone to 30 per
cent price falls
Do your homework before buying off-the-plan apartments, dwellings. Erin Jonasson
by Duncan Hughes
Buyers of some capital city apartments bought off the plan and sold within 18 months are
losing up to 30 per cent of their investment, confidential analysis by the nation's largest
valuation company reveals.
The potential loss of more than $150,000 in the value of average-priced apartments not only
highlights the need for buyer caution, it's causing lenders and regulators to turn the screws on
developers and borrowers by toughening the scrutiny of building projects before final lending
commitments are made.
Tony Kelly, managing director of valuation group Herron Todd White (Melbourne), says
tougher inspections will improve standards and reduce risk.
The analysis tracked sales of apartments acquired off-the-plan and then resold in the market
to a genuine buyer (rather than back to the developer) within 12 to 18 months. Developers
have been known to buy back a property at an inflated price to prevent a lower pricing
benchmark for the apartment block.
The data reveals a fall in the resale price of 10 per cent-20 per cent. That could mean a
$130,000 loss on a $650,000 apartment in 18 months.
Stamp duty, legal fees and agent's fees could strip another 10 per cent of the buyer's capital,
or a loss of $150,000 on the same apartment. These losses are compounded if the currency
exchange works against the overseas buyer and additional foreign taxes are included.
"A large number of buyers are from overseas and China," says Kelly. "They will judge their
money in bricks and mortar in Melbourne and a safer haven even if a loss is evident. Like all
investors, if the market is below what you paid, then why sell now."
Losses have also been offset by the comparative strength of the Australian dollar.
"There has not been enough stock being resold into the market to be an influence or to catch
the eye of the main research houses," Kelly says. "Like the Australian mining industry the
real trouble will come if the Chinese stop buying."
Lenders and regulators are introducing procedures to ensure that valuations provide more
accurate, timely and thorough assessments.
Final valuation
That means final valuations are conducted only when the valuer can go on to the building site
and walk through the building, which because of occupational health and safety rules is
typically a few weeks before completion.
"Lenders are tightening up to make sure their risk is being managed well," says Mike Zissler,
chief executive of valuers' association the Australian Property Institute.
About 60 per cent of lending applications for all properties (not just off the plan) require a
third party valuation. The rest are handled by banks internally using their existing database.
The new rules agreed to by lenders and valuers apply to new apartments, property with three
or more dwellings on one title, mixed residential/commercial properties and display homes.
It is considered "best practice" by both valuers and lenders because it provides all parties with
the most up-to-date information based upon a range of criteria, ranging from market
conditions to quality of finish.
In the past many lenders would make approvals based on the building's plans or desk-top
valuations, based on nearby properties or similar structures.
Off-the-plan buyers need a conditional approval at the project's outset based on criteria such
as position, fixtures and size.
There is another valuation on completion.
Last inspection
The final inspection involves spotting any differences in the quality of finishes between the
show room and the completed apartment, variations in size, whether car spaces are included
on the same title as the associated unit, quality of the view and general amenities.
There are also differences in rules between states and territories that can influence the
valuation.
For example, in Victoria, balconies, car park and storage cages (which can boost an
apartment size by 5 per cent on property titles) are not included in the advertised size.
Problems can arise for borrowers if the completed apartment's value is less than the original
price, either because of market movements or inferior construction.
Australian Prudential Regulation Authority is also warning lenders to pay closer attention to
the kind of apartments being developed, particularly those that are poorly located, small and
lacking amenities.
The volume of new apartments is approaching the average number of apartment sales overall
in the past five years, according to analysis by CoreLogic.
This problem is most acute in Perth and Darwin, where apartment prices are falling by more
than 6 per cent a year, according to SQM Research.
But a market correction, which might result from rising interest rates caused by a steep
increase in wholesale borrowing costs, could weaken confidence and encourage buyers to
dump stock.
Check before buying
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Are you paying too much? Resale values might be less than predicted at time of purchase.
Location. Is it within 15 kilometres of the central business district? It is near transport,
amenities?
Changes to plans. Consider any terms in the contract that may allow the developer to
change the original plan. Changes to buildings are often needed during construction but
make sure they are fair and reasonable. It's best to have an experienced lawyer check the
contract.
Check the builder's record of completed project and quality finishes, and whether the
builder and developer are insured for losses and delays. Does the project have development
and certification approval?
Quality of finish. Better quality fixtures might have been used in the display apartment or
house.
Management contracts. Prospective buyers are entitled to inspect contracts between
owners corporation and caretakers/building managers. What are you financially responsible
for?
Does your apartment have a large percentage of owner-occupiers? How much competition
will there be for tenants?
Exclusive use. Check the developer has not registered by-laws giving exclusive use of
desirable parts of common property, such as the roof, to owners of certain lots. If so, what
are the terms and conditions?
Check the rental yield and the prospects for capital growth. Low rental income might be
offset by strong capital gains. The right mix will ensure a successful investment.
Read more: http://www.afr.com/real-estate/off-the-plan-apartments-prone-to-30-per-cent-pricefalls-20170308-gut7h4#ixzz4as7bIsD6
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