Buying apartments off-the-plan involves construction risks and uncertainty about the quality of the finished product. Unhappy purchasers have limited recourse to protect their interests.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Having signed a binding contract, the purchaser is obliged to complete the transaction even if the underlying property market changes dramatically during the construction period and the promised finance does not eventuate.
In some locations such as Canberra, Brisbane and Melbourne an oversupply of apartments are causing both bank valuations and rents to fall, adding to the pressures on purchasers. Purchasing a completed apartment avoids many of the risks of off-the-plan purchases because the valuation for funding purposes is known at the time of signing the contract.
This funding certainty doesn't guarantee a successful investment because, as for off-the-plan purchases, this will depend on future movements in property prices. The risks involved with finding tenants and obtaining satisfactory rental income still remain.
But at least the certainty of funding and the tax deductibility of investment losses help avoid any forced pressure to liquidate the investment. These are not luxuries that are afforded many off-the-plan purchasers. The Australian Prudential Regulation Authority's crackdown on banks' investment lending practices and a softening property market have increased the possibility of not being able to complete the purchase.
While financial institutions may have promised financing for an off-the-plan purchase, this funding commitment is almost always for a set percentage, commonly 80 per cent of the valuation at the time of completion. Fast disappearing are the instances where the valuation at completion exceeds or equals the contracted purchase price.
Valuations are now coming in at discounts in the range of 10 to 20 per cent of the binding purchase price, forcing purchasers to significantly increase their deposit. Even if only a small percentage of off-the-plan purchasers are unable or unwilling to find this additional money, the result is forced sales and further downward pressure on valuations of apartments yet to be completed.
As the situation now stands, the risks are being borne by off-the-plan purchasers struggling to settle. But ultimately the downward pressure on valuations will increase the bad debts of financial institutions on loans to existing investors. The downward pressure on valuations and rents will continue for a substantial period until the impending and actual oversupply of apartments in various locations disappears.
Given the boom in property construction still in progress, this could be some time off.
Now is not the time to consider new off-the-plan investments. Indeed, holding off on new purchases, even for owner occupied purposes, individuals could benefit from the lower prices certain to follow the completion of the large number of off-the-plan projects in the pipeline.
Daryl Dixon is the Executive Chairman of Dixon Advisory
