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We all hear about the benefits of off the plan developments, but aside from stamp duty savings, groovy new dwellings and small holding deposits, what are some of the perils?
Blogger: Cate Bakos, director, Cate Bakos Property
Many investors have flocked to off plan developments in the past because they were either encouraged by the marketers who were promoting them, or lured by the stamp duty savings (in Victoria, the State Revenue Office calculates the stamp duty based on the land plus improvements at the time of the sale. For an off plan development, this can often mean that those who get in early enjoy the benefit of only paying for the calculated duty on the land, which in many cases is a fraction of the cost of the payable stamp duty on the finished product).
To compound this ‘benefit’, in a rising market we have often read about those who made stellar profits by anchoring their purchase price early with little down payment (often in the form of a deposit bond), and then riding out a rising market and on-selling the apartment before settlement to a higher paying buyer. What we don’t like to admit to ourselves in the world of fast profits is that sometimes the pendulum can swing the other way. There are huge risks to taking on such an adventure and recently during the GFC and after did we see the negative ramifications of this vulnerable space in our residential property market.
When clients ask me about my thoughts on off plan properties, not only am I vocal but I share with them the five key reasons why I avoid off-plan properties;
1. They tend to be higher density. Higher density means lower ‘land to asset’ ratio. Given that land appreciates and buildings depreciate, you will find that as your glossy new apartment dates and ages, your value will be compromised. To compound this, the percentage of land you actually own (ie. for a one in fifty apartment block, you will ‘own’ one fiftieth of the block of land), is smaller than that of a traditional older block with minimal units on the block.
2. When one higher density block goes into a street or area, usually more follow. This can lead to an oversupply and all of the issues that go with this, ie. overcrowded street parking, overshadowing, higher proportion of tenants etc.
3. The units are all very similar. This can have a negative effect if a seller sells at a super-low price (in the event that they might be in financial trouble). It has a knock-on effect on the value of the other ‘similar’ units
4. The landlords all go into competition with each other on a very large scale when the block is first released and settled. This competition pushes down rents and pushes up vacancy rates. All bad stuff for investors. ?
5. Developers are good at ‘selling the dream’. It means that in a lot of cases people pay silly over-inflated prices for units which aren’t worth the sale price. Buyers who buy off the plan assume that the stamp duty savings are putting them in an advantageous position but this benefit is eroded if they pay a silly price.
There are three questions an investor should ask themselves if they are convinced an off plan purchase is a good idea;
- Is the person recommending this asset to them independent to the transaction (ie. are they receiving a fee for service or are they getting paid a percentage of the deal?)
- Can the investor sustain the loss if the market drops and can they still finance the purchase?
- Is the price right?
If any of these points are answered with a ‘no’, then the purchase decision needs to be re-evaluated.