Are off the plan properties good investments?
The rate of apartments being offered off the plan is increasing, with developers of high density residential needing a certain amount of pre-sales before the development can kick off. These apartments are generally offered at a cheaper rate with incentives sometimes pinned on, but are these properties a good investment?
Property Observer has asked industry professionals from buyers agents to developers to weigh in with their thoughts.
They were each asked: Can off the plan properties be good investment? Why or why not?
John Carfi – Chief executive officer of Mirvac residential
YES, IF YOU BUY WISELY
off the plan properties can deliver great returns to investors, providing a stable rental income, the potential for capital gain and tax benefits through depreciation and negative gearing.
When investors buy property off the plan they are essentially buying sight unseen so the first rule should always be to ensure the developer and builder are reputable with a track record of delivering quality buildings as specified and on time.
The returns will be determined by many factors depending on whether the investor is intending to hold and rent or 'flip' the property to make a quick profit.
Flipping, or speculative purchase, is a much riskier investment strategy, and presumes that the market will rise and a profit can be made before or soon after settlement. It’s a gamble that may not turn out in the investor’s favour.
For those seeking a medium to long term hold, the factors to consider are the appeal of the property to tenants. If the property is well-designed with a high level of amenity, close to public transport, infrastructure such as schools, shops and open space it is more likely to attract a higher rent and be easy to let.
There are many tax benefits associated with owning an investment property and they are most favourable when the property is new. However this should not be the sole criteria for investment.
Another factor that will impact upon yield is the strata levy. These are not set until settlement however investors need to be aware that inclusions such as swimming pools, gymnasiums and the other attractive selling points of the development will need to be maintained by the owners corporation.
Most investors will be looking for capital gain and if you have bought wisely, a good quality product in a good location, the gains should be in line with the market.
Todd Hunter – Director at wHeregroup
off the plan IS RARELY A GOOD INVESTMENT
Let’s look at this practically, the developer is selling a product. They have worked out their numbers to the exact dollar on a spreadsheet and know how much they can sell for as a minimum. But who wants minimum?
As a property owner, when you sell, you want the maximum price don’t you? Well, so does a developer. Their issue is that they don’t have a big market presence in Australia so quite often they employ the services of a marketing company to spread the word to buyers right across Australia. They often have referral networks consisting of accountants, financial planners, and mortgage brokers to help them sell to their client.
Now these marketing companies do not work for free. Nor do the referral networks. The developer doesn’t want to drop their price either, so their fee is simply added to the developer’s sale price.
So why not go direct to the developer and cut out the middleman? Greed, by the developer to sell one at an increased profit as well as keep price consistency for valuation purposes.
It’s only when they have financial issues that they will liquidate and you can maybe get a deal.
Second reason - GST – why do you think that car prices drop by at least 10% the moment they drive out the driveway? Because the GST must be paid. The same is for properties but not on sell price but GST is paid on all good and services used to build the property.
For those reasons I have not seen many off the plan purchases of late that are worth investing in.
Next page: Paul Biller and Damian Collins
Paul Biller – Principal of 1st City Hasemer & Caldwell-Eyles
off the plan PROPERTIES CARRY GREATER RISK THAN PURCHASING AN EXISTING PROPERTY
An off the plan purchase carries greater risk than purchasing an existing property as it is very difficult to establish fair market value for what the property will be worth on completion or predict an accurate future rental return. There will also more than likely be an oversupply of competing properties for rent when the development is completed due to other investor sales in the complex, ultimately resulting in having to lower the asking price in order to secure a tenant. Other things to consider are the project may not proceed if the relevant council approvals are not granted; the finished product may differ to what you anticipated; you can’t physically walk through the property you are buying.
There are however many advantages to Buying off the plan including buying at a better price. When developers first offer their new projects they often offer them at discounted prices in order to secure required pre-sales for the bank. When the required number of pre-sales is met and construction begins the prices generally rise. Therefore, for investors who commit early to an off the plan purchase there is often a good price incentive.
Another advantage is the depreciation benefits. The newer the property the more tax deductions are available. The buyer is able to claim depreciation on their tax for items including fixtures and fittings. As the benefits are greatest when the property is brand new – Buying off the plan maximises your available tax deductions.
As an off the plan purchaser you may get to customize your new property. Often buyers may have a choice of finishes to choose from including different colours, tiles, various fixtures and fittings as well as layouts which the developer may be able to incorporate such as merging two apartments into one large one.
There are also various government grants and stamp duty exemptions to first time property buyers.
As with all property purchasers, be sure to do your research. Look at the median apartment price growth in the area and research the project team including the developer, architect and builder.
Damian Collins – Director of Momentum Wealth
GENERALLY, off the plan APARTMENTS ARE NOT GOOD INVESTMENTS
Generally off the plan apartments are not good investments. Investors are often enticed to "get in on the ground floor" and hope that the property will be worth more at settlement than what they paid. Certainly in a rising market a property may be worth more than what you paid. But on the other hand I've seen many investors buy off the plan and find at settlement that prices are 20% less than what they paid. If you are buying for the intended gain before settlement then you are really a speculator, not an investor.
For the long term investor an off the plan apartments provide additional risks. Firstly at the time of buying it may appear that there is limited supply on the market. However, if the market starts to see demand, developers in that area may release a substantial number of new properties leading to potential oversupply and poor price performance.
One of the key reasons why off the plan apartments are generally not good investments is that there is too much building value and not enough land value. Ultimately the land goes up in value and the building depreciates. Many high rise apartments have little land content and the long term lower growth rates reflect this. Particularly with off the plan apartments, you are paying for a nice shiny new property that in a few years may not look so new to any future prospective buyers.
off the plan sales are great for developers as it helps them get finance for their projects with enough pre-sales. If you are an owner occupier not focussed on the capital growth and you find a property that you think is ideal then it may be suited to you. However if you are an investor, give off the plan properties a miss and find a property with a good land value in an area with limited supply and high demand. You'll be sure to make much more money that way.
Next page: Ross Le Quesne and Kevin Lee
Ross Le Quesne - Mortgage broker at Aussie Home Loans
ENTER WITH CAUTION
A brand new property in a new development is very appealing, but like buying a new car, you may find yourself paying a premium for something that is worth less the moment it's yours. off the plan properties can be overpriced due to the additional entities involved. The developer and builder need to make their profits, as well as a marketing agency (who can charge 5% selling fees) which inflates the price you pay.
To ensure you're not paying too much, you must always do your due diligence. Research the area and what similar properties are selling for now. Make sure the assumed future value (the value of the property by the time of completion) has not factored into what you've paid for the property. You want to be paying today's price when you sign your contract.
Buying off the plan can sometimes be profitable. If you're buying in a growing area and you pay market price at time of purchase, meaning that by the time you pay for your property (sometimes 18 months later) you've already gained equity. You will only know that you're paying the right price if you're familiar with the local market and can verify comparable sales.
To minimise the risk of paying too much you need to do your own research. Don't fall -n love with the idea of a brand new property, if you think you're overpaying you need to walk away.
Kevin Lee - Buyers Agent at Smart Property Adviser
There has always been a degree of risk associated with purchasing residential properties off the plan, yet for some investors, a well-researched off the plan purchase can represent a solid opportunity and good strategic addition to their portfolio.
However we need to put this out there right now: don't purchase property 'off the plan' with the expectation that it will automatically increase in value whilst its being built.
Yes some people made significant capital growth on both existing property and off the plan purchases over the last 40 years - however you could be sadly mistaken if you put all your money on that horse over the next 20, 30 or 40 years.
This is a 'changing of the guard' moment in Australia's history, unlike anything we've ever witnessed.
The days of 'property doubling in value every seven to ten years' (if they ever did exist) are long gone. In fact I'm still looking in the Australian Constitution for where it says that "by merely signing a purchase Contract, you're entitled to capital growth".
If however 'chasing capital growth' is still part of your game-plan for 2013 and beyond, then you should only ever count on matching inflation - maybe a touch more in the long term. But know this - you will most likely have significant periods of negative or nil growth.
Having said that, there are a number things outside your control that can actually help create capital growth. Two that come to mind immediately are: poor government planning & laws that restrict development; and natural geographical constraints that limit development (e.g. Sydney and South East Queensland's urban development confines).
Infrastructure development - or Urban Renewal programs - instigated by either Local, State or Federal Government are like a "free renovation" for your property. So if you can, choose an off the plan development in a metropolitan area where significant government infrastructure spending has been committed - not just planned. Politicians are good at 'talking the talk' - you need to ensure their money is committed in order for the rest of that old cliche to be played out.
Off the plan developments can sometimes prove to be a good opportunity for first home buyers to get into the market faster, with most state governments offering first home buyers significant incentives. For example in NSW they'll put $15,000 on the table and waive the stamp duty for purchases under their self imposed price threshold.
Savvy purchasers though will ensure that they aren't getting in over their head financially - this is your first home remember. Not your last!
Also - if you are Buying off the plan you'd be we'll advised to do so as early in the piece as possible. Why? Because that's when developers are willing to offer their 'best terms' as you are actually helping them de-risk the project and qualify their proposed project for construction funding! They need you: it's that simple!
Finally, if the project, style, location and 'it' factor appeal to you and a few of your mates then think about going in as a 'group' - you will get a better deal. Think of it this way: it's like the company that buys a fleet of new cars pays a fair bit less that you do for your purchase of just one.
As I said at the outset, there is always risk associated with Buying off the plan - do your homework and mitigate that risk as best you can.
Next Page: Adam Sparkes
Adam Sparkes - Director of sales and marketing at Crown Group
GET IN EARLY AND HAVE A LONG-TERM VIEW
The key thing to remember when North Melbourne, especially when buying into well-known developments, is the best investment returns are made by those who get in early.
Buyers who purchase in the first release are offered lower prices and a greater selection of apartments than buyers in subsequent releases or at completion - which means those who get in early also have more choice when it comes to position and aspect.
Adding to that, buyers who get in early can see capital growth even prior to completion. This occurs if similar properties in the development are sold off the plan later in the lifecycle of the project for higher prices. For example an apartment on level 5 sold for $1 million followed by a similar apartment on level 6 sold off the plan nine months later for $1.1 million, the latter provides a benchmark for valuations of the level 5 property sold earlier. This scenario can offer investors a chance to make capital gains faster than they may with existing properties.
Many of us have heard of the scenario seen in some Sydney developments in the early 2000s when investors purchased apartments off the plan and saw values significantly increase before completion. While, I feel this is unlikely to happen again in Australia (and I would caution buyers solely motivated to buy apartments off the plan and hoping to sell for a large capital gain before completion), purchasing off the plan can present an attractive proposition for buyers willing to take a long-term view. Investors buying with a view to hold the apartment for five- 10 years are better positioned to ride out the property market cycles and see good capital gains.
Other benefits of buying brand-new apartments include tax deductable depreciation allowances usually are higher for off the plan properties than existing properties, in addition investors are also eligible to the same out–of-pocket tax deductions as an existing property, making off the plan apartments an attractive proposition for savvy investors.
Finally, to give yourself the best chance of good medium-long term capital growth when Buying off the plan, it’s worth looking at existing and future infrastructure in the area, including transport, hospitals, universities and schools. Finally, the facilities provided in the development itself, such as function rooms, pools, gyms and well-appointed foyers are becoming increasing important to tenants and buyers.