Sydney off-the-plan investors facing high risks

With Sydney’s unit prices reportedly falling in some high-supply areas, causing conflict between vendors who want to sell and developers who want to maintain prices, RiskWise Property Research has renewed its call for caution when buying off-the-plan.

The research house had been warning for months that there were “significant and tangible risks” associated with buying off-the-plan units. 

These dangers include equity risk, cashflow risk and settlement risk, and we can see the potential realisation of the latter in the example of Blacktown.

Blacktown, which has 602 units in the pipeline equalling an addition of 11.2 per cent to the current stock, features in RiskWise’s Top 100 Danger Zones for off-the-plan properties.

And it’s Blacktown's first high-rise residential development, the $60 million 24-storey Altitude Tower, where the risk is the greatest.

In Blacktown, traditionally, there is a very strong demand for houses and townhouses.

But a high-rise tower in this area carries an extra level of risk due to the high degree of uncertainty regarding the demand for units in the development.

Another issue with large unit blocks is the valuation that is usually based on the ‘comparison method’.   

Put simply, a property that is sold in the free market as a secondary sale, in this case between two private parties and not by the developer, sets the benchmark for the fair market value for other properties within the same development, with the relevant valuation adjustments based on each property configuration, features, etc.

Which means if the actual selling price to another investor is lower than the ‘contract price’ with the developer this could have a major impact on the pre-settlement valuations of many units in the project, with some buyers struggling to cover the shortfall between the ‘contract price’ to the pre-settlement valuation.

He said the widespread oversupply issue was universally acknowledged by banks which had ‘blacklists’ for postcodes suffering potential unit saturation.

Lenders will either require a much higher deposit as security on their loan, or they may turn down a loan application entirely.

Lenders understand that oversupplied suburbs carry a greater degree of risk – and those risks are just as real for the investors who buy in those suburbs. 

In fact, they are one more risk on top of a number of unique dangers inherent in off-the-plan builds.

Off-the-plan investors had to obtain finance approval after construction was complete, and if the market had sunk during the build period, they were paying the mortgage on an over-valued property.

Squashed property values and high vacancy rates are hallmarks of the new oversupply issue.

Taking out the No.1 spot in RiskWise’s Top 100 Danger Zones was Zetland, a former industrial zone 4km south of Sydney’s CBD with its high-density unit developments.

Other areas include Waterloo, Epping, Holroyd and Schofields.

About Doron Peleg is the CEO/Founder of RiseWise Property Review. He has more than 20 years’ experience in risk management including, Co-Founder of Peleg, Kessel & Co, an assurance and advisory accounting firm & Executive Manager at Westpac Banking Corporation in Sydney. www.riskwiseproperty.com.au/