Despite warnings from numerous off the plan naysayers, it seems beginners looking for a cheaper entry point into tightly held inner city precincts, are succumbing to clever marketing campaigns and seriously questionable investment ‘advice’.
The number of so called financial and SMSF ‘experts’ pedaling new apartment stock to clients, who are none the wiser that a hefty commission is being paid for their referred business, has grown exponentially alongside the current high rise apartment boom.
These ‘advisers’ push ‘benefits’ like stamp duty savings, depreciation and low deposit requirements, making these developments seem too good to refuse.
A recently released report from Oliver Hume Real Estate Group, exploring greater Melbourne’s off the plan apartment market, shows approvals for multi unit dwellings are currently at record high levels.
In fact almost half (46 per cent) of all new building approvals across 2014 were for apartments in high rise complexes, with more than 20,000 units released last year (8,800 in the CBD specifically).
Honey, I shrunk the apartment!
Even more concerning, are findings that indicate these already compact, one and two bedroom apartments are apparently getting smaller.
The report revealed that the average size of a one-bedroom apartment fell from 47 square metres to 44 square metres in the final quarter of 2014. While two bed dwellings in these vertical monoliths have been reduced to an average 59 square metres, from a slightly more generous 62 square metres.
This ‘Honey I shrunk the apartment’ phenomena has been getting worse for a while, as money hungry developers look at ways to increase their bottom line and cash in on current heated levels of local and foreign investment activity.
Just over two years ago, the average size of a one-bedroom unit in Melbourne peaked at 55 square metres, while the average two-bed apartment was over 70 square metres.
What’s most alarming about this glut of downsizing stock crammed into generic mega-towers is that even as the square footage decreases, the prices increase. Someone has to pay for those costly commissions after all!
According to Oliver Hume’s report, entry prices for Melbourne‘s one and two bedroom apartments are $365,000 and $489,000 respectively, representing a 1 per cent increase across 2014.
And if that isn’t enough to have you running for the hills when someone suggests you should purchase a teeny off the plan dwelling, then perhaps leaked draft guidelines prepared by the Office of the Victorian Government Architect, mandating that no apartment be less than 37 square metres will give you cause for pause.
Is that even big enough to swing a cat? (Please be assured that I do not condone cruelty to animals on any level, it’s just a saying!)
Essentially, unsuspecting investment newbies are being sold assets that will cause them massive headaches, even before they have to compete with the thousands of other landlords in neighbouring buildings, desperately seeking a tenant for their money pit – sorry apartment.
But wait, it gets worse!
As if shrinking floorplans and rising prices weren’t bad enough, reports from last September indicate that apartment values across Melbourne and Sydney are falling by up to 20 per cent from the time of purchase to settlement.
In other words, misinformed purchasers are paying up to 20 per cent too much to own an investment that’s losing equity straight off the bat.
It’s estimated that almost 44 per cent of all apartments currently coming on line across our most populous cities, are below sale price at completion.
This is hardly surprising when, like I said earlier, you consider that these properties come with sizeable developer margins to compensate for those generous commissions and glossy marketing brochures.
Experts (those not in the pocket of off the plan developers) warn it can take between six to ten years for your apartment to realise the same value as what you paid initially. Not the greatest addition to a portfolio is it?
No favours with the banks
The way things are going, you have to wonder whether there’ll come a time when lenders will simply refuse to finance the acquisition of these new breed of off the plan apartments.
Risk adverse banks already find them problematic and they’re only going to become a less attractive form of mortgage security, as they get smaller.
Banks already see high-rise complexes as unappealing prospects, so much so that they’ll outright refuse finance to a purchaser if they already have a high level of exposure in the one building.
In other words, if you happen to bank with a particular institution and approach them for an off the plan loan, they could easily say no, based on already having funded too many other apartments within the same complex.
Then of course there’s the question of what happens if the lender’s valuation comes in under the purchase price? Not an unlikely scenario and one that would leave you up the proverbial creek with nary a paddle in sight!
And now as the size of the asset shrinks, I’m afraid so too will the inclination of Australia’s top tier lenders to hand out any money at all for these properties.
Builder blues
A further risk with OTP investments is that the builder might simply fail to complete construction and you’ll potentially have no legal recourse to get your deposit back, let alone receive any compensation for your troubles.
If the banks start to get cold feet and more of these transactions simply fail to be completed, this is a very real possibility. Large national construction companies rely on funding from off the plan sales to construct the building, but if the banks won’t pay you and you can’t pay them, what are the ramifications?
It will be interesting to see where this latest off the plan apartment boom leads some of our major city property markets across the next few years.
Perhaps after falling out of love with the wide-open spaces of suburbia, we’ll start to embrace the idea of downsizing more readily as a nation?
Somehow though, I don’t know that we’re quite ready to be crammed into high-rise residential towers like sardines. Food for thought, yes?
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).