Last week, both Macquarie and CLSA warned that that the residential apartment boom could end abruptly as the approved apartments fail to get converted into commencements and completions.
On Friday, ABC’s The Business ran the above segment warning that thousands of off-the-plan apartments are coming online, which are “flooding an oversupplied market”. This has led to the unusual situation whereby landlords are competing to rent out their properties by offering incentives, such as free wifi, iPads and $500 Coles vouchers, in order to lure tenants into a lease.
Funding risk is the key issue facing the off-the-plan apartment sector:
Off-the-plan purchases involve putting down a deposit, usually 5-10 per cent of the developer’s asking price for the unit, with the rest of the purchase price due on completion…
Buying off-the-plan, investors take the developer’s word at what the apartment will be worth when finished – but banks value only on completion.
Banks have recently tightened their lending terms for investors and sometimes will not increase what they are willing to lend.
For example, an investor might sign a contract to buy an apartment for $500,000 in 2016 but by the time it’s finished in 2018 the bank values the property at just $400,000.
The bank will not lend the investor any more, but the buyer still needs to find an extra $100,000 to pay the developer.
This can mean owners are scrambling to secure finance to make up a shortfall – usually at a high rate of interest.
“They have to find additional money,” said Mr Dixon.
“In some cases, if they don’t complete the contract the properties are put up for fire sale again. The purchaser is still liable for any loss involved at the time of the resale”…
“The good old days of buying off-the-plan and being sure the property will be worth more when you settled then when you paid for it are long gone”…
Buyer’s advocate Sam Lally warned it can take years for resale value to equal what was paid originally.
“There’s just far too many of them. They’re compromised on space, compromised on size,” he argued.
“There’s no scarcity value, they’re all the same. So if you have one apartment on the market, there’ll be another one in the same building probably anyway.”
In other words, steer well clear of this market. Unless you are a prospective renter, in which you should drive a very hard bargain.
