If you’ve been reading my blogs you’d know that I have strong feelings about off the plan apartments – avoid them!
Now there’s another reason to avoid off the plan purchases.
According to new research from the Oliver Hume Real Estate Group, the size of the typical off the- plan apartment has shrunk.
About 30 new off the plan projects – offering a total of 3,420 units – were put on the market around Melbourne in the first three months of this year and this will cause a huge oversupply if they are all built.
In these new developments the one-bedroom units had a median size of 48 square metres, 4% smaller than the typical unit in a development launched in the December quarter.
The size of two-bedroom units fell by almost 6% to 66 square metres during the same period.
Interestingly, the drop in size for one-bedroom units hasn’t been matched by a decline in the median asking price, which actually jumped by $17,000 to $387,000. In contrast, the median entry price of a two bedroom unit fell by $46,000 to $499,000.
Let’s look at a few other reasons I would avoid high-rise apartments:
Firstly there’s the land to asset ratio. Remember investors want the land to asset ratio to be as high as possible – they want to own as much valuable land under their apartments as they can. They know it’s the land that appreciates.
On the other hand when a developer chooses a development site they focus on getting the land to asset ratio down as low as possible – they want to build as many apartments as possible on that block of land. Essentially the interests of the developer and the investor are opposed to each other.
Even more important than that, in the current climate one of the big issues with buying off the plan is finance.
And I’m not talking about developers having difficulty getting finance and therefore having to charge above market rates to get their developments across the line. I’m talking about the finance an investor needs to complete the purchase.
Since most loan approvals are only current for three months, obtaining a formal pre-approval for an off the plan purchase is a waste of time. The problem is, currently we have 4 big banks in Australia and they each have a policy restricting their exposure to any one building. Most won’t lend to more than 15% of the properties in a building. This means that if there are 100 apartments in the building and you are the 16th person to approach the bank when the building is completed, they may decline your loan application.
This means many investors who buy off the plan, won’t be able to settle and will need to sell their property – at whatever price they can achieve
Then there’s the other group of buyers who never intended to settle their purchases. They bough on the hope of flipping their properties on completion at a higher price. After all that’s the suggestion much of the advertising makes isn’t it/ The price of your apartment will go up considerably between the time you buy and when the project is completed.
Unfortunately that’s not unusually how it works.
This means you have 2 groups of investors selling up when the project is completed. Those that can’t get finance and those that never intended to settle. And the lead a downward spiral of asking prices depending upon how desperate they are to sell.
If you’re one of the off the plan purchasers who intends to hang in there and hold on to your property, having a whole range of properties for sale, often at considerably below your contract price, drags down the value of your property when you want the bank to lend you money to settle. This means that the banks will only lend on the new lower valuation price (the lowest asking price form the desperate sellers in the building) rather than the price you paid.
The other thing many investors forget is that even if the banks will lend for your new high rise purchase, they will usually only lend at lower loan to value ratios than for other types of properties, meaning you need a bigger deposit.
Another concern is that most off the plan developments are sold to investors, yet I like buying properties in buildings that have a good proportion of owner-occupiers. I find they tend to look after the buildings better and this enhances your long-term capital appreciation. It’s not much fun going to an owner’s corporation meeting full of investors who are not keen on spending money (or can’t afford to) to maintain the building.
If that’s not enough to put you off buying off the plan, let me give you a few more reasons.
The uncertainty of completion dates or if the project will ever get out of the ground, the level of finishes and the market conditions when you eventually take possession should mean you pay a discount for taking certain risks. Instead when buying off the plan today you are generally paying a premium to the current market price.
Don’t get me wring. Apartments make great investments. But currently established apartments give investors better bang for bucks. They are generally larger than new apartments, in smaller blocks and have the potential to add value through renovations.
For my money, well located established apartments can make great investments.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.