Here’s why you don’t buy off the plan

[troyhunt]

I was thinking back to a thread from a while back just this week and thought it might be worthwhile posting a follow-up. The original thread was about buying off the plan and the general consensus was “don’t”. At the time I said I’d had success being the second owner of properties bought off the plan in very recent times. Here’s an example which really illustrates this:

Southport on the Gold Coast 5 years back and the Southport Central complex is selling 2 beds, 2 baths off the plan for around the $600k mark. As early as Feb that year and over the preceding years we’d been buying 2 beds and 1 or 2 two bath properties for the low $200k mark in very clean, older style buildings (10 to 15 years old), some as close as the adjacent block to Southport Central. The new developments were clearly overpriced, but they were still selling.

Fast forward a couple of years and the towers (there are three of them), begin reaching completion and settlement is due. This one on the 22nd floor with views over the southern Broadwater and ocean settles at $601k. Now go forward another couple of year and the owners want out. What’s it worth?

They go to auction in May last year and don’t get a bid so they relist in July for $440k. Ouch! Around about this time the bank seizes the property. No takers by August so they drop to $424k. The selling agent is our existing PM for other Southport properties and he puts if forward to us so we offer $370k and get told by the administrator that we’re dreaming. Get round to November and now we’re down to $400k asking price. Yesterday settlement went through at…..$370k.

So the bottom line is that someone did $231k of their hard earned in the space of four and a bit years – that’s a 38% drop. Or put another way, someone paid 62% more than what we just did a few years back for the same piece of real estate which incidentally, has never even been lived in. Plus of course all the acquisition, holding and disposal costs.

Whilst Southport and the Gold Coast in general has copped it a bit recently, those same low $220k properties we were buying back in 06 could easily sell in the high $200k range and are all yielding 7% plus with depreciation still remaining. They’re as good as cash flow neutral.

Whilst it’s not always so black and white, I did think it was interesting to reflect back on that original thread after this week’s purchase. Who knows where this style of property will be priced in a few years’ time, I’m pretty sure it won’t be back at $601k in the near future. The only thing I’m sure of is that while sales offices are flashy, agents are slick and the allure of shiny and new remains, buyers will keep stumping up inordinate amounts of cash to have the privilege of being the first owner.

 

[tom32]

Buying off plan magnifies your gains and your losses.

I don't see a diffence in how much they lost whether they bought another schmick unit next door finished for 600k or one off the plan for 600k this is what the whole market was worth at that time for that quality. Both would now have lost them 230k either way. Indeed the finished one wouldhav cost them more in interest to hold.

Anyway if it makes you feel any better people on the gold coast have a look at this joint. I want one badly but it is not the right kinda joint for a family.

http://www.oceanique.com.au/oceanique

If you bought one of them off the plan you have taken a significant hammering since. Still real quality places worth a premium I reckon.

Does anyone know what is going on with them. I drove past the other day at sunset and their appeared to be only a few occupied and even them may just be for show?

People just have to realise when signing up for off the plans that they have more to lose than just their deposit in most cases.

Good way though with little money to get a lot of exposure to the property market you just have to be pretty confident in what you are doing.

 

[Ocean Architect]

many people have made pretty good money from OTP purchases, but it really does come down to the complex. That one sounds like a stinker, and you only really got that price because it was oversold in the first place.

To give you an example where I live (and our building restrictions are far greater than in QLD in terms of height controls, cyclonic building codes etc):

Lets use the example of the CBD versus first suburb out of the CBD in Darwin over the past 36 months.

If you buy a house block in the first suburb out of the CBD you're looking at about the $400k mark and up depending on size (capping at about the $600k mark) for a bit of context.

Next step down, you're looking at a townhouse block, which generally sell for $170k-$200k per townhouse able to be built on the block, and 3 years ago were more like $120k-$140k.

Next step you're looking at a medium sized high rise (4 storeys max) for which you will pay between $90k-110k per 2BR unit and $130k-170k per 3BR unit. 3 years ago it was more like $70k for a 2BR and $110k for a 3BR.

In the CBD, the per unit land value floats around the $50k mark. 3 years ago it was more like $100k, even though you were buying air space.

Construction costs are relatively similar throughout (depends on who you get to do it/what their situation is/what finishes you choose) yet strata is significantly higher in the CBD (200%-300% higher).

Anyway, everyone bought into the "get a highrise apartment in the city off the plan because you'll never get one again at this price" craze at pricepoints above $600k, whilst simultaneously, while sensible others bought in boutique complexes in the first suburb out in the mid $300ks, with lower strata, smaller complexes, and greater land component cost.

Fast forward to today. Those $600k CBD properties are selling in the high $400s, whilst the mid $300k first suburb out properties are selling in the high $500ks.

So really it isn't an OTP issue, it's a "don't ignore construction, land value, and replacement cost fundamentals" question.

Just my perspective

 

[Belbo]

A very interesting and instructive thread. Nice work all!

I was recently very seriously contemplating buying an IP off the plan in Newman WA, in a new 40-odd housing development estate. Not quite the high-life, but the asking price for a 2-bedder was still a whopping $645K (reduced to $630K in preliminary negotiations, with indicative rent of $1,200 /wk, less a small strata levy for estate upkeep).

I decided instead to try purchasing elsewhere at similar money for a similar yeild on an existing property, as it would be feeding me cash from day 1. I like cash!

What will be very interesting to me now though will be seeing what the secondary market in this Newman development looks like in 12 months, when (and, of course, if) it reaches completion (NB: which is not something I seriously doubt will happen in this instance, but you never know).

My expectation is that the Newman development will see a 25% CG during its construction phase, while my similar yeilding property will see perhaps 15 to 20% CG over the same period.

Of course, if China tanks they'll both go under, but Hey . . . anything for an interesting life!

Disclaimer: I know I might have drawn this thread a little off topic, but can't comment on either the Gold Coast or Darwin after-markets with any semblance of intelligence whatsoever. I'll leave that to others!

 

[citystar]

Currently under construction is H20 on the corner of Welch St and Nind St. A twin-tower project comprising of hundreds of apartments within 23 and 21-level towers fronting the Broadwater. This project is progressing nicely, with a few business owners I personally know in negotiation for retail/ commercial leases on the ground and 1st level floors. I am curious to know how pre-sales are going for this apartment. None of my tradie mates know anyone working on this project to find out such information.

The neighbour to H20 is the exclusive senior’s only high rise on Marine Prd boosting luxury apartments and villas over 25 levels fronting the Broadwater. Speak to the residents and body corporate and this brand new high rise has been in trouble from day one, having been taken over by receivers relatively quickly after expected pre-sales levels were non existent. If you go for a walk along the renovated Broadwater in the evening you will only see a dozen or so lights on in the entire building. Being an over 55’s high rise this is in a total separate market to what Troy and myself are buying up at the moment.

I could continue to highlight completed and approved projects within the Southport area that will be priced above the $600k mark. In the mean while investors I know including myself continue to focus on the older one-to-two bedroom, one bathroom apartments in Southport that have rental prices that the majority can afford. I know a lot of investors who are holding onto their $600k+ brand new apartments in Southport, waiting for a slight boost to property values and rental returns upon completion of the Gold Coast Light Rail and Griffith University Gold Coast Hospital. The only reason they can afford to do so is because of positively geared properties they hold in other suburbs/states, otherwise they would be selling them to investors like Troy for a mere fraction of their purchase/holding costs.

 

[beachgurl]

Is it likely we'll see something like this in Melbourne, particularly around Docklands? API this month discusses the possible oversupply of new development around there.

 

[troyhunt]

Buying off plan magnifies your gains and your losses.

In the case where people are doing the deposit bond thing, I can see a case for this, but what's the case for buying off the plan magnifying gains? Sure, you could time the market well but that's not really any different to buying post-construction.

I don't see a diffence in how much they lost whether they bought another schmick unit next door finished for 600k or one off the plan for 600k this is what the whole market was worth at that time for that quality. Both would now have lost them 230k either way.

What's different is that by the time construction is complete and occupation is happening, the promise of having a big whack of increased equity at settlement is gone. It takes the speculation factor out of the equation. I also wonder if there's a factor of no longer being able to spec certain aspects of the unit to the purchaser's desire decreasing the emotional tax they're willing to pay.

That one sounds like a stinker, and you only really got that price because it was oversold in the first place.

I certainly agree with the second statement, but there's no evidence to suggest the first one is accurate beyond the price drop which is pretty common. We're seeing that in other constructions in the immediate area (the whole Sundale redevelopment is a good example, as is citystar's comment), and other locations around the country (we paid $268k for a 1 bed in Wolli creek recently, a couple of years after the original owners paid $370k off the plan). There's nothing physically wrong with these places - great facilities, well built, fantastic location - they were just priced way too high and people were willing to pay that at the time.

Currently under construction is H20 on the corner of Welch St and Nind St.

Interesting how Nind street is transforming; Audi moving out to High street seems to be signalling a shift from being a car yard to a resi centre (wonder how long the "Nind Street" street sign with the red car will last?!)

I know a lot of investors who are holding onto their $600k+ brand new apartments in Southport, waiting for a slight boost to property values and rental returns upon completion of the Gold Coast Light Rail and Griffith University Gold Coast Hospital.

I'm got high hopes for the light rail in particular, but we've got a few years to wait on that one (2014 for phase 1). With the current vacancy rates and state of sales, I can't see much happening before then anyway.

 

[tom32]

I reckon based oncompletion number through 2009 and 2010 Melbourne looked overcooked even if you put talk of a bubble to one side.

the difference between Melbourne and a joint like the gold coast is while many people are tied to the construction industry building these units in Melbourne, on the gold coast it is a huge portion of the employment. So upon completion you have the dual impacts of less workers living there moving away when the construction boom ends and more units on the market.

Not saying it will be like Dubai but it that is an extreme example of what happens when a market is overcooked on the construction side. You have a shortage of units for people to live in while they build more units but when the music stops suddenly anyone holding the baby looks like a bit of a goose.

 

[tom32]

In the case where people are doing the deposit bond thing, I can see a case for this, but what's the case for buying off the plan magnifying gains? Sure, you could time the market well but that's not really any different to buying post-construction.



What's different is that by the time construction is complete and occupation is happening, the promise of having a big whack of increased equity at settlement is gone. It takes the speculation factor out of the equation. I also wonder if there's a factor of no longer being able to spec certain aspects of the unit to the purchaser's desire decreasing the emotional tax they're willing to pay.

It is similar to buying an option really.

You put down 60k and have exposure to a 600k position in the market. If it goes up it magnifies your investment in a way buying a whole unit cannot.

I guess unlike an option you can lose more than your deposit though! i.e. you can get hunted for more than your 60k down.

Though you must look at both the positives and negatives. Just because on the gold coast people got burnt does not mean buying off the plan is always a mistake. If the broader marekt is going up you are likely to do well out of it and even possibly get finance for a deal you otherwise would not have (now thats risky!)

 

[Ocean Architect]

I certainly agree with the second statement, but there's no evidence to suggest the first one is accurate beyond the price drop which is pretty common. We're seeing that in other constructions in the immediate area (the whole Sundale redevelopment is a good example, as is citystar's comment), and other locations around the country (we paid $268k for a 1 bed in Wolli creek recently, a couple of years after the original owners paid $370k off the plan). There's nothing physically wrong with these places - great facilities, well built, fantastic location - they were just priced way too high and people were willing to pay that at the time.

What usually happens is that a developer overextends themselves badly during upswings, leverages themselves to the hilt, and uses cashflow from other jobs/IPs to keep the whole shell game going with the bank. I personally think that that is pretty reckless on behalf of the banks, but I digress. So they sell at massively inflated prices to a bunch of delusional property flippers who think that they're getting a deal.

Fast forward a year or two, when the property developer is holding several properties themselves that they either wanted to keep, or wanted to sell when completed for a higher price, and someone gets a valuation done that comes in vastly lower than the original OTP sell price. Then everyone freaks out, and people like me make popcorn by the wheelbarrow watching everyone in the complex either frantically sell, are forclosed on, or hold their breath until they turn blue saying "no, it's worth $600 000 whether the market says it is or not! I'm rich dammit! Don't you realise that I'm rich?!?! I own a concrete dogbox 35 metres in the air that will go up by 20% as soon as I get a certificate of occupancy, I'M RICH DAMMIT!!!" and then the real fun starts when people start suing the developer/valuer and they're in the paper every second day

The problem compounds when the complex is severely oversold, which just hurts everybody. The developer usually finds themselves in the same boat as the everyone else because instead of owning one property, they own 9 and they hit their cashflow ceiling/find themselves in a massive bind, especially if they banked on paying their massive tax bill through the sale of units. Even owner occupiers who could mostly afford it take a hit as surrounding properties sell at firesale, which just hurts their LVR for at least a year or two while the dust settles. The only ones who generally win are the builders, because the developer usually generously overpays because their profit potential is so high and they value speed/committment over sensible pricing.

In other words, from a developers point of view, a stinker.

Much more sensible is to sell things at realistic prices regardless of how hot the market gets (cap your profit at about 22%), and whatever you do, sell OTP at least enough to cover the entirety of your liability plus contingency, or leave you in a LVR position based on apocalyptic pricing. That way, you and your clients sit on your balcony slurping on cocopops while the buildings around built by developers who thought they were bulletproof go down in flames.

I'm watching precisely this scenario happen right now on multiple fronts and am endlessly amused. Do you know how ridiculous it looks when someone who has "My Name Here - Property Speculator" on their business card takes a developer to court because the value of the property on completion isn't what they thought it would be, and actually lost money? Dude, you're a speculator. That's another word for "gambler". Go take the casino to court cos the dealer got 21 and you lost fifty bucks or something

 

[redwing]

Buying off plan magnifies your gains and your losses.

I don't see a diffence in how much they lost whether they bought another schmick unit next door finished for 600k or one off the plan for 600k this is what the whole market was worth at that time for that quality. Both would now have lost them 230k either way. Indeed the finished one wouldhav cost them more in interest to hold.

Anyway if it makes you feel any better people on the gold coast have a look at this joint. I want one badly but it is not the right kinda joint for a family.

http://www.oceanique.com.au/oceanique

If you bought one of them off the plan you have taken a significant hammering since. Still real quality places worth a premium I reckon.

Does anyone know what is going on with them. I drove past the other day at sunset and their appeared to be only a few occupied and even them may just be for show?

People just have to realise when signing up for off the plans that they have more to lose than just their deposit in most cases.

Good way though with little money to get a lot of exposure to the property market you just have to be pretty confident in what you are doing.

Cruised past these on Friday

According to the Port Bouvard site

In 2007 Port Bouvard commenced sales and construction of one of the most exclusive residential apartment developments along the Western Australian coast, the Oceanique Luxury Apartments.

The highly anticipated $160 million Oceanique Luxury Apartment development was officially released to the public in July 2007, with sales to date exceeding all expectations. In total, over 40 of the 67 apartments have been sold, representing over $100 million in gross sales value.

Located within the Southport precinct at the Port Bouvard Residential Resort Estate, all apartments have been designed to ensure dual views; to the golf course and ocean to one side, and over the golf course/estate and estuary to the Darling Range on the other.

Apartment owners will be delivered by lift to either a private lobby or directly into their apartment, depending on the apartment layout. This has created a significant privacy factor that has already received tremendous praise from the buyers to date. The variation of available sizes and layouts has meant that the apartments are suitable to a larger cross section of the market.

And from Perth Now last November

A PERTH-BASED property developer has discounted its apartments at Port Bouvard by up to 40 per cent as it looks to move its focus to the bigger Point Grey development.

Developer Port Bouvard today said it had started an aggressive marketing campaign for the remaining 26 apartments at its Oceanique luxury apartment development.

The centrepiece of the campaign will be the up to 40 per cent discount on the apartments’ original asking price, with the prices starting from $780,000.

“The market is vastly different to where it was in 2007, we acknowledge that, so we have priced our remaining apartments to ensure they sell for a price that still provides a suitable return to the Company and offers an attractive value proposition to purchasers,” Port Bouvard chief executive Johnno Wroth said.

“The aggressive sales campaign is targeted to sell the remaining apartments within this iconic development and is based on a need to ‘meet the market’ and to complete Oceanique in a timely fashion, to allow the Company to focus on the long-term development of its next flagship, Point Grey.”

 

[tom32]

Thanks redwing.

Looks like you can occupy them if you want to. My concern was without a critical mass of occupants they might not bother turning the lifts on etc due to the expense and my drive by the other day did not look like many were home if any.

Anyway anyone from the east looking to holiday to play some golf you could not beat this;

http://www.holidayrentals.com.au/property.asp?id=brad rodgers&origin=HolidayRentals

I should stress again as I am sounding cynical, I reckon as far as value goes they are pretty good value even at over 750k. You could not build that complex for 50million to that finish let alone the golf course etc around it.

$170.00 a night for that kind of apartment is pretty good value for short term holdiys.