Thinking of buying property off the plan to build your investment portfolio whilst living abroad? In this article, we discuss what you need to know before jumping in the deep end and why we don’t recommend it.
Sponsored post by Michael Cleary of Milk Chocolate Property Concierge.
Should You Be Buying Property Off The Plan
As an expat, the thought of buying property off the plan (usually apartments) can be an exciting experience. Companies will typically visit large expat communities and hold free seminars with canapés and champagne, there’s the shiny marketing material, the freedom to choose your colour scheme and how easy they make the purchasing process, which lets face it for a busy expat is very appealing. I understand why people get wrapped up in the buy now; pay later, rent guaranteed excitement that the developers sell you. As a previous expat I’ve had to talk myself out of many of these appealing deals.
In this article I want to share some of my experiences and research with you on the hidden pitfalls that the glossy sales brochures don’t tell you and why we always recommend to steer clear from buying property off the plan.
When developers are marketing and selling a new development, they pass on commissions to financial advisors, mortgage brokers and accountants in the hope they will recommend their developments to their clients. These commissions are usually around 6 – 8% of the purchase price. There’s also the cost of the extensive marketing campaign, stamp duty reductions, the developers profit margin and rental guarantees*. All these fees can add an additional 10 -15% onto your purchase price. When it comes time to resell the apartment these costs can no longer be factored in and unfortunately you may find the property isn’t worth what you paid for it.
In 2015, WBP Property Group valued 1,700 off the plan purchases with 50% of the valuations coming in lower than the sale price. In the findings it was noted that in some cases areas had naturally declined in capital growth by the time the development was completed. However most of the time the apartments were simply overvalued by the developer between 10 and 15%.
Buy Now, Pay Later:
Average build times for developments range between 18 months to over 3 years to finish and in most instances when buying property off the plan a 10% deposit is all the developer requires from you. There are a number of factors with these extended payment periods that really concern us.
Firstly, Australian finance institutions have recently tightened and are constantly reviewing the criteria for expat lending. Some rules you need to look out for include:
- If you are an Australian citizen married to a non Australian citizen in some cases FIRB approval is required**
- Lenders grade currency and are applying a straight deduction on your salary, if you’re not being paid in strong currencies like the Pound, Euro or USD.
- LVR’s (Loan to Value Ratio) is generally 70%
- Some large financial institutions like St. George Bank have stopped all off the plan development lending to expats
The Australian government has also recently changed it’s ruling on foreign investment, this ruling allows for foreign buyers to ‘recycle’ their off the plan purchase to another foreign investor if they are unable to settle. This is to combat the heightening risk of settlement failure in the apartment market.
Secondly, if over the development period the suburbs capital growth declines due to market conditions changing such as planned infrastructure projects being put on hold or cancelled, employment opportunities dwindling or simply because the suburb now has an oversupply of new apartments, the property may no longer be worth the contracted amount. Your mortgagee (or lender) will do a final valuation on project completion and if their valuation and the contract value don’t align, or the banks lending rules have changed in that time, they will only lend you money based on their valuation and the new lending rules. This difference will cause a shortfall, which means you’ll have to fund the difference from savings, another loan or risk not being able to settle and losing your deposit and the apartment.
Competition Isn’t Always Healthy:
If purchasing for investment purposes, you’re generally after the highest rental yields and greatest profits (if you do decide to sell). It’s always important to keep in mind that you are competing against every other investor in that particular apartment block – all after the same tenants. The more desperate one investor might be, the greater discount they might offer to prospective tenants. Generally making it harder to see consistent growth in rents for the apartment block. The same theory applies to the resale of your apartment; a diligent purchaser will look at past sales in the block and use that as an indicator for a fair and reasonable benchmark. If an investor takes a fire sale approach, this can be pivotal in setting the benchmark for the block.
Not What You Were Expecting
As an expat living abroad buying off the plan property (and even if you have family and friends on the ground keeping a close eye on things for you), unfortunately you don’t have any control over the workmanship going into your new build. If it’s not up to your standards, there is little you can do. Most developers don’t allow the apartment to be viewed until completion. You are typically given a 30 – 60min spot to view the property for the first time and list any defects. There are numerous stories of the square metres being smaller than the contract of sale floor plan and specs, doors hanging in different locations and floor plans generally being tweaked without prior consultation or consent. City Futures Research Centre conducted a study in 2012 that found 85% of off the plan apartments built after 2000 have building defects and of that, 75% are still yet to be repaired. Trying to handle the defects process or chasing repairs whilst out of the country can be time consuming and difficult.
Is The Developer Above Board?
Unfortunately in any business, things can turn sour. If a developer does come into financial difficulty or has business issues during the build phase you have the potential to lose your deposit and your new apartment.
The Suns Not Always Shinning
In all off the plan contracts, there will be a ‘sunset’ clause. This clause allows the developer and the purchaser to rescind the sale/purchase of the apartment if it hasn’t been completed by the agreed date. If the suburb you are buying in has gained capital value during the construction phase, like many in Sydney have, the builder can slow the progress of the build and default on the agreed milestones outlined in the contract, give you back your deposit and resell the apartment at a higher price based on the areas capital growth. Leaving you with no apartment and potentially priced out of the suburb you wanted to live or invest in.
The More The Merrier
With apartment developments this isn’t always the case. CoreLogic are reporting that an additional 230,000 apartments will be built in Australian capital cities over the next two years that simply won’t have the same demand for people wanting to buy or rent them, with the majority of developments being ready to settle this year. Sydney prices are still taking everyone by surprise and in 2016 had a 9.6% increase in apartment prices. However there is great concern that Brisbane and Melbourne CBD’s will have an oversupply of apartments causing prices to sharply drop and investment properties to sit vacant. In 2016 apartment prices in Brisbane fell by 0.2% and in Melbourne only grew 1.7% compared to a capital city average of 5.9% mostly driven by the continued demand for apartments in Sydney.
Money From The Tax Man
One of the positives with buying property off the plan is the depreciation benefits a new build gives, which allows for greater negative gearing opportunities. It’s important to remember that most expats are non-residents for tax purposes, so therefore can’t take full advantage of any negative gearing opportunities (see How negative gearing works for Australian Expats). Most banks also won’t allow negative gearing income to be taken into consideration for expat loan applications. And then of course there is the ongoing discussion in parliament around negative gearing altogether.
We certainly aren’t saying all off the plan developments are bad, as above the Sydney apartment market has seen strong growth in 2016. What we are saying is if you are buying property off the plan be very diligent in your research, know the market, the developer and be able to weather the storm if the market conditions move and banks or governments change legislation.
*A rental guarantee is when the developer promises to cover your rent until you find a tenant, usually between 4 and 8 weeks after settlement. They aren’t being friendly; this cost is simply added to your purchase price.
** Australian Foreign Investment Review Board www.firb.gov.au
- WBP Property Group
- City Futures Research Centre
- The Australian Financial Review
- SF Capital
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies referred in this article.
Need Help Buying Property Whilst Living Abroad?
Michael and Richie are both founders and directors of Milk Chocolate Property Concierge. They understand first hand what it’s like buying property whilst living abroad. As two former expats that lived in North America and Europe, they have been buying, renovating and selling property in Australia for the past 10 years.
Milk Chocolate is a bespoke property concierge business that exists to buy and renovate property on behalf of expats living abroad. We are a true concierge service, taking care of every last detail of your property purchase. Using the latest technology, data and communicating in your time zone, they ensure the experience is rewarding and enjoyable one.
Mention the Australian Expat Investor when contacting Milk Chocolate, or complete the form below and you will be entitled to not only a free initial consultation to discuss your needs and to see if Milk Chocolate is right for you, but you will also receive a free voucher to the value of A$500 to treat yourself to a celebratory dinner in your country of residence when you sign up to use their services (and pay your initial fee).
Interested in buying property whilst living abroad? Here are some related articles to this story that might be of interest to you :
- Benefits of Using a Buyers Agent
- 6 Steps to Buying Property Whilst Living Abroad
- 8 Benefits of Investing in Australian Property While Living Abroad