Property investors beware: off-the-plan purchases

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Property investors beware: off-the-plan purchases

This was the message from David McMillan, Director Acquisitions for nationally based property investment advisory service, Performance Property Advisory (PPA).

He warms of the triple-whammy effect of an over-supply of off-the-plan apartments, (particularly in locations like Melbourne), falling property values and the recent APRA changes which will begin biting in the months ahead.

In Melbourne, 80% of off-the-plan purchases are made by investors (a significant proportion being overseas Chinese investors), with just 20% going to owner-occupiers.

“In Melbourne we currently have a situation where there are simply too many off-the-plan apartments and not the available rental population to make these investments worth their while.

“We are also seeing the value of generic off-the-plan high rise, fringe house and land packages falling by 10% – 15% in some pockets of Melbourne caused by oversupply and weakening demand. What this means is that the price paid at contract date will be higher than the value of the property at settlement.”

Mr McMillan says with the APRA changes and the big four banks now requiring a 20% deposit from property investors, those with off-the-plan contracts will have to stump up the additional cash required to settle.

“The problem with off the plan is that there is a significant lag-time between purchasers making the initial deposit and actually settling on the property which can happen anything between two to three years later.

“What this means for off-the-plan investors, who say, put down a 10% deposit on a $1 million dollar apartment, will now have to come up with an additional $100,000 to settle.”

Mr McMillan says those largely affected will be investors with off-the-plan properties in their self-managed super funds.

He blames unscrupulous advisers, accountants and financial planners for herding their clients into risky investments because they stand to pocket commissions of 3-9% on the purchase price of the property.

While Mr McMillan welcomes the changes made by APRA, saying they will moderate an over-heated market, he says that sadly there will be collateral damage. “Those most affected will be people who can least afford it: often those close to retirement who have used their life savings to purchase property via their SMSFs.”

He advises those who currently hold off-the-plan contracts in Melbourne (and Sydney to a lesser degree) and are yet to settle, to seek out immediate advice from qualified property investment advisors.

“Find out how much additional cash you will need to come up with in order to settle. If you are unable to settle, investigate on-selling the property before negative sentiment really kicks in. However, if on-selling is not an option, seek legal advice.”

However, Mr McMillan says Australians should not be put off property investment.

“There is significant money to be made from investing in property, provided it is done properly and you receive right advice.”

His key property investment recommendations are:

  • Avoid off-the-plan. It is and will always be the riskiest way to invest in property.
  • Avoid markets heavily driven by investors and focus instead on areas where home buyers dominate, such as Brisbane where 70% of the market is made up of home buyers.
  • Avoid markets that are oversupplied with dwellings targeted at investors. This is especially relevant in Melbourne where off the plan apartments are dominated by investors. However this is not the case in Sydney.

 

Finally don’t rely on your gut feelings, project marketers or real estate agents. Seek out the best independent advice you can find.

 

This media release featured in the following publications:

http://www.afr.com/real-estate/dont-buy-a-melbourne-apartment-off-the-plan-says-burnt-buyer-20150922-gjs04w

http://www.smartpropertyinvestment.com.au/news/14671-increased-risk-for-inner-city-markets

http://www.theadviser.com.au/breaking-news/33244-off-the-plan-purchases-fraught-with-danger

http://www.mortgagebusiness.com.au/breaking-news/9139-residential-property-overvalued-and-over-owned

 

More about ……. Performance Property Advisory is a nationally based property investment advisory service assisting mid to high income earners build and grow their property portfolio. Its focus is blue chip residential property and homes in Melbourne, Sydney and Brisbane. As a comprehensive outsource property investment advisory service, PPA selects and acquires property, manages property portfolios, reviews property’s performance and facilitates the sales process.

For more media information contact:
Wendy Parker PR on 0422 694 503