Off the plan

[waz11]

Hi all,

I was just thinking recently about the state of the property market in many parts of Australia. In a lot of areas there has been little movement in values and in some areas values have been going down a little.

An idea I was thinking about was possibly going and getting into some off the plan developments that weren't due for completion for several years. A few reasons for this would be that many of the developers could be finding it difficult to sell their properties, therefore there would possibly be cheaper purchase prices - plus if the properties arent going to be completed or settle for a few years then there could start to be a turn around in property values and one could benefit from this without having to have outlayed too much money from the beginning and no holding costs.

Now im hoping that some people can poke some big holes in my idea for me so that I can realise whether this may or may not be a viable option. I am guessing one of the things some people may say is that it won't take 'several' years for a development to be completed - but as I have never purchased off the plan before I have no idea about this.

So please let me know what you think about the above.

cheers,

Waz11

 

[Jamie]

Hi Waz11,

A few quick points:

Youre right, if a development takes 5 years to build, and property prices increase markedly during that time, then you are well placed to make some money - as many did buying OTP just before the boom in most of the capital cities. But, like leverage, time in OTPs is also a doubled edged sword. You could lock in a price now, only to find prices in the areas fall 10-20% in the next 3-4 years. If that happens, youre looking at taking a big loss if you have to sell (indeed, if you CAN sell it), and if you keep it, you might find a bank wont be keen to lend much against it. This is has been happening to many people who purchased OTP in places like Southbank in Melbourne, where an apartment they paid 800k for is now valued by the bank at about 600k

Another issue is that many OTPs arent priced according to supply and demand, like established properties are - they are priced on developer's margins. And the price you are offered today might not reflect the current value - it could reflect instead what the developer thinks it will be worth in 3-4 years, eroding the increase you are hoping for.

There are many other issues - making sure the specs are what you actually paid for, big increases in body corp fees (well above what the developer quoted), competition for tenants when 100 units are released to the rental market simultaneously - the list is quite long.

This isnt to say OTPs cant be good value, with the right type of property, in the right place, and at the right time. Buying OTP just means youre analysis has to include a few more variables you dont usually have to worry about buying established property.

All the best,

Jamie

 

[geoffw]

Several years ago, I was talking to a developer (big time stuff- large comercial developments- he's soon to become my brother in law). At that time, I was interested in a scheme where it was possible to purchase units at 50% discount by paying cash up front. My financial advisor was putting syndicates together.

The developer's advice was not to touch it- if he really needed that sort of funding, then he was on shaky ground financially already.

I didn't touch it, the developer went broke, and investors lost all their cash.

(This was the same advisor who put me into the tax effective agricultural schemes).

 

[dantheman]

Hi Waz11,

I had the same idea 3 years ago. Everyone was talking up the demand side, that buyers would keep pushing prices even higher and that if I wanted a Sydney apartment I would have to get my price locked in now.
Settlement time is coming, and it's the uncertainty that worries me. Things are fine now, but if the market takes a turn before my Christmas settlement and the valuation comes in below par, I will be forced to sell some of my share portfolio to make up the difference. My shares are returning about 100%pa, and to sell growth assets like that to put the money into a stagnant apartment would be a shame.
If I had the option again I wouldn't signup. I would probably buy a regular house and land.

Dan

 

[waz11]

Otp

Thanks for the info guys.

There does seem to be a tonne of extra considerations that need to be taken in to account when looking at an OTP development.

One of the possibly good things though does seem to be the timing of it. If I look at purchasing towards the end of the year, in many places it would have been near 2 years of stagnant prices. Add another 3 - 4 years of development and there is 5 or 6 years out of the property cycle of not much growth - which would then possibly leave the place in a good position for growth in the following years.

I shall take this info on board and rethink my ideas.

Cheers for the assistance...

Waz11

 

[alexlee]

If you think prices are going to be flat for 5 years, wouldn't it be better to just leave the money in a high-yielding bank account, get 25% interest over the five years, and buy established properties in 5 years? With a flat market you'd be able to buy even more with (hopefully) a bit more certainty about the market.

As the others said, OTP is riskier because you can't see the finished product.
Alex

 

[wish-ga]

An idea I was thinking about was possibly going and getting into some off the plan developments that weren't due for completion for several years.

A friend bought a unit as a ppor in Camperdown in Inner city suburb of Sydney, development was not fully complete. Being done in stages. Was supposed to include cafe/gym/swimming pool eventually.

She bought for a certain price on the premise that the above facilities would be in the complex. Now the residents have been told that the swimming pool will not be built.

She and the other residents are taking legal action against the builder/developer which may be different arms of the same company.

That is the sort of thing that I would be concerned with when buying OTP.