I understand the attraction of an off-the-plan property investment. I nearly dropped a $50,000 deposit on a huge development close to Brisbane CBD back when I was getting started with property investment in 2011. I was lured by the attractive bonuses such as:
- Cash back on settlement;
- A free furniture suite;
- Rental guarantees for the first year;
- High levels of depreciation deductions; and,
- Government stamp duty concessions that were available for new build properties.
However, I’m really glad I didn’t sign. A close mentor of mine asked some sensible questions which made me back out of the deal and rethink my strategies.
Reason #1: Future price growth is built into the purchase price
The developer and marketers of these projects have to make a margin somehow, and this is one of the techniques they use. Don’t assume that the value of the property will increase as they say it will in future – it will be affected by overall macro and micro economic effects. Do your research. You could be overpaying such that you won’t get the benefits of any capital growth for up to a decade. Where do you think the rental guarantee is coming from? You’ve already paid for it.
Reason #2: Off-the-plan properties typically take much longer than they forecast (it could be years!)
That delay is extra opportunity cost for your deposit money which could have been invested in an established property the same day you signed that contract with the developer. For the property I was looking at, I was originally told completion would be in 2012 but it didn’t finally complete, three years later, in 2015. Meanwhile, I managed to buy two established properties in Sydney over the same period, because my first property started working for me as soon as I settled on it in January 2013.
In fact, watch for the sunset clauses in contracts. In several cases where projects have been delayed past the sunset date, the developers revalued the properties at a higher price and required all the depositors to stump up the extra cash!
Reason #3: Build defects
With off-the-plan developments, strata is often mired with building defect issues for years after the completion of the property. If these only start to appear after the developer has checked out, it could run into the millions of dollars for the strata to fix. In the case of large blocks with many investor owners, it could then also take a long time to reach a resolution on course of action, while your apartment with a leaky roof loses its tenant.
Reason #4: There is no guarantee the final product will look the same as the glossy brochure.
Sometimes, in order to improve their project margins, developers will choose cheaper fittings and fixtures in the final product. Developers generally have the right to make minor changes to the size and design of the apartment without breaching the contract.
Reason #5: Fire sales on completion
I once heard recently that 70% of off-the-plan properties get valued below purchase price by the bank at settlement. In this case, you have to stump up additional deposit money, or you’re toast (you could be sued by the developer). In particularly bad cases, this causes a series of fire sales in the building, all at the same time. As everything in the building is similar, that makes it a commodity and decreases the market price for units in the building. Assuming you managed to scrape through settlement, this could be devastating to your future capital growth plans.
Reason #6: Lower owner-occupier appeal
Often, these developments are large towers close to or in the city which do not have broad market appeal for owner occupiers, as they tend to be smaller square footage and do not have the same access to lifestyle options such as cafes and restaurants. You want owner-occupier demand, such as rich families, to push the price of your property up in future. Unfortunately with the cost of development these days and rampant NIMBYism in the middle suburbs, high rise stock in the city seems to be the only type of real off-the-plan apartment developments going. Odds are the block will end up full tenants who will never purchase a property in the block. Don’t be surprised if the rent you get doesn’t meet what the developer suggested you could get either; high supply of similar units coming on the market at the same time will not guarantee an optimum revenue!
Conclusion…
Don’t do it. Just don’t. Unless you have money to burn and it’s the dream property for you to live in. If you’re just getting started on the path to financial independence through property, buying it will be a handbrake at best (and hitting it in the reverse at worst), preventing you from getting to your next property sooner.
I would only recommend off-the-plan to the seasoned investor who is familiar with the risks and to pick a smaller development, where there is still some scarcity value about the property which minimises downside risk considerably, while retaining the attractive depreciation deductions.
ausfinny 