When will OTP buyers suffer?

[DennisLeung]

Hello all,

Given the current boom we are seeing in house prices all over the country, it is no surprise that Chinese investors are jumping into the market by the bucketload. Many of these Chinese investors are choosing to invest in large complexes of OTP apartments in growing areas, including those with already large proportions of Asian populations. Companies such as Property Investors Alliance and Ranlan Property Group are selling not only the OTP apartments themselves, but are also packaging together a management service whereby the company also hires property managers to handle the day to day mechanics of the ongoing investment.

My question here is this; given that most members of Somersoft know that 99% of OTP investments are duds, when will we see these local and overseas Chinese investors who are buying up these newly built complexes suffer for their folly? Will it be after this current boom is over - or will it be in 10 years time?

The reason why I'm asking this is that I know of a few friends of family who seemingly have made a lot of money from buying OTP products. One who bought an apartment in the notorious "1 Railway Parade, Burwood" made about 200K in equity and then has plunged that money back into the market and bought another 3 OTP products. They seem to be convinced that making money is this easy, just to hand cash over to a developer/company, they pick the product, it goes up in value and then they buy more. In my head I'm thinking, how is this all happening?! They have bought what we know at heart are overpriced homogenous housing and making a fortune from this, whereas I am still stranded here with my package in my hands too scared to make a decision.

What I also want to know is what the reality of this situation is and the long term effects of this on housing trends? Is it that Chinese investment into these OTP is merely them ultimately subsidising the rent of people who live in these apartments and/or will it have an impact on the supply of housing in the particular area, whereby future investments in unit based housing in the area will be untenable due to the flooding of supply?

 

[jerrybee]

Sorry to take this a little off topic, but since the market is hot anyone holding 1 Railway Pd should take this as an opportunity to get the hell out. They will never have another opportunity to part ways with this. Give it a few years and things start falling apart (I already saw some of them had MOULD when it LAUNCHED...seriously, how on earth does a brand new apartment have mould), I predict a couple of devastating emergency strata payments. It would not surprise me to see owners hit with tens and tens of thousands "without" warning. That building is an epic disaster. I can't believe people aren't taking this very lucky opportunity to run while the market is hot...I find it harder to believe people are still buying what does go on the market. Do they not inspect the quality of the place? I don't think I've seen such a junk quality construction in my life.

 

[Truly Exotic]

Depends how long they have had it for and.when, where and how much they bought it for

Buying otp for 800k and making 200k after 12 years isn't a good return even the the gross gain might be impressive

 

[mini2]

Property Investors Alliance seems to be a funny one, they're trying to lure people in renting those properties they even have a pop-up stall in Westfields Parra offering a Honda Jazz as a raffle prize.

I was thinking the exact same thing as the OP...so they've sold a whole bunch of OTP with a promise that they will get a tenant when it's ready to move in but looks like even themselves are now panicking that won't eventuate

 

[travelbug]

I too know people who made mone on OTP. BUT they bought in 1998 or thereabouts. EEVERYONE that bought property in 1998-9 made money (in Sydney)

When did they buy the OTP property? What about the other 3? When did they buy them, how did they go?
In a rising market you are OK. I have also seen people lose money. Mainly those that bought at the end of the Sydney boom (around 2003). Things died and they then got their newly completed properties that didn't come up to expected valuations.

Adding to jerrybee's comment. There were lots of developments built in 200-2004 that were rushed due to needing to get in before the fenzy died. I have seen some woeful building work. Properties less thanb 10 years old literally falling apart.
Buyer beware!!

 

[marg4000]

In a rising market you can make money on OTP and make it quite quickly.
If you want to take the risk.
In boom times OTP properties often change hands several times before completion, each sale making a profit.
Marg

 

[The Y-man]

In my head I'm thinking, how is this all happening?!

It comes down to if there are holding costs for them - i.e. will they get rent? what are the outgoings? - and perhap more importantly - do they need rent?

If they are buying outright with no loans, the income factor may not be that critical.

The Y-man

 

[mrdobalina]

Given the current boom we are seeing in house prices all over the country, it is no surprise that Chinese investors are jumping into the market by the bucketload. Many of these Chinese investors are choosing to invest in large complexes of OTP apartments in growing areas, including those with already large proportions of Asian populations.

The Chinese investors invest in what they know - which is often apartments in enormous complexes in large capital asian cities. And Asians like to buy new, not secondhand. Since they don't have knowledge of the local market, they get pulled in by the OTP marketers.

 

[Redwood]

There is so much OTP sales at the moment, you will see whole buildins sold out in days. For me, a generall comment is, in the inner city these complex are priced for Chinese buyers so there is a 10% or so premium, and this is reflected in the 'independent' valuation. Yes, valuation, OTP are usually coming in under valuation and this is 18 months or so after the purchase.

For anyone considering OTP, please do your due diligence, it may be attractive to see sales go through, but who are buying them?

I had a client put in an offer for the Mirvac development at Docklands using her super, once she told me I said 'are you nuts' reason is the purchase price was $1.1m and she couldnt afford the deposit. Generally, I would not invest in docklands, or OTP in inner city where there is chinese demand, as the vals just won't come in.

Ensure:
1. due diligence
2. request independent valuation
3. rental guarantee?
4. independent rental appraisal? (most provide an 'internal' independent appraisal)
5. due diligence on the developer, most are struggling on cash flow, what if they go broke?

All the best!

Cheers, Ivan

 

[Aaron_C]

Well in Melbourne OTP buyers have been suffering for the past 15 years and are continuing to suffer in some pockets.

 

[DennisLeung]

I just don't understand how these people can gloat to me about the fact that they bought a substandard OTP property in Burwood NSW (the really ugly one next to the train station) and say that it has increased by 200k in 2 years and now they are skimming the equity to buy more. This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

 

[Dbz_Vic]

I just don't understand how these people can gloat to me about the fact that they bought a substandard OTP property in Burwood NSW (the really ugly one next to the train station) and say that it has increased by 200k in 2 years and now they are skimming the equity to buy more. This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

I think we should all look at it as a business and not take it too personal. Those people just got into a product that had high demand and hence made money from it. Simple as that. Doesn't matter if its crap quality, or looks bad, as long as people want it! That's business!

However I seriously doubt bank vals would have increased $200k in 2 years though. Market value maybe, but banks are usually conservative. Also not all OTP properties are bad, you just got to do due diligence like people said, the usual checks, know your market and numbers! That's all.

 

[The Y-man]

This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

Seriously man, why does it bother you? Be happy for them if it works out for them - and feel sorry for them if things don't..... or are you just envious because you weren't in on it?

The Y-man

 

[joeExpat]

When I lived in Sydney OTP purchases were a bit like stock market IPOs, money for nothing so there were long queues outside sales offices back then. Things have decidedly changed if they are not seen as good investments anymore.

 

[vaughan]

Well in Melbourne OTP buyers have been suffering for the past 15 years and are continuing to suffer in some pockets.

The back pocket?

 

[Melbournian]

OTP apartments are suicidal - all the ppl I know who bought them recently have gotten burned.

The ones who made money bought in the late 90s to early 2000s. after that it was all down hill from there.

as for the chinese, they don't really care - they're here to park their money or move their money into Australia. there is a difference, they're not necessarily interested to make a gain. I know of a chinese buyer who bought 3 properties in brighton as kids were studying around the area. the only one was used as a residence, the rest was left empty not even tenanted. to get money out of china and some Asian countries is not that easy, so if they have a reason like kids education etc to enable them to get the money out, they go all in.

 

[alexlee]

This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

What'd they ever do to you? OTP buyers make money, fine. They lose money, we can learn from it without losing any money ourselves. What's with the heartstrings?

 

[bez23]

Such hate/ jealousy from the OP. be thankful that the OTP prices are holding up ( for now ) . Highlights the strength of the property market and good flow on effect on other property markets.

If there is a big crash / correction for OTP, your investment properties won't benefit from that.

OTP isn't popular for people in SS because of its inherent risks but it doesn't mean we wish they should do bad either .

 

[sanj]

I just don't understand how these people can gloat to me about the fact that they bought a substandard OTP property in Burwood NSW (the really ugly one next to the train station) and say that it has increased by 200k in 2 years and now they are skimming the equity to buy more. This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

that is a pretty odd post. injustice and stab in the heart? drama much?

 

[BayView]

I just don't understand how these people can gloat to me about the fact that they bought a substandard OTP property in Burwood NSW (the really ugly one next to the train station) and say that it has increased by 200k in 2 years and now they are skimming the equity to buy more. This really is a stab in the heart and a sense of injustice. When will there be a day of vindication for us?

Why would you wish bad fortune on them, or be miffed because they have done well?

Here's an anecdote that might make you feel better;

We bought our last PPoR in 2000 for $305k - it went to auction and was passed in at $310k. We wandered past some months later and saw it still for sale, so offerd $305 and a short settlement, and got it.

It was a completely renovated house; owned by a builder who lived in it with his family and did all the work himself...a buy/reno/sell project which he did often as it turns out. He had finished the reno in 2009. It was an old beach house which he added onto and modernised; but cheaply as possible with fittings.

A few months later, my wife was in the hair salon, and the girl asked her where we lived..turns out she knew the previous owners - the wife went to the same salon - and the wife had been raving to her about how well they did out of their recent sale (our house). So they made a nice profit at our expense, right?

I should feel ripped off, right?

Wrong - it was our PPoR, it was decent value for the area, and we absolutely loved it and would have paid a bit more if we had to. We were deliriously happy...good luck to the previous owner I reckon.

Fast forward to 2008. I started doing a complete reno on that same house, in readiness to sell so we could build our next PPoR on our vacant block across the road.

Our area a holiday destination primarily, and is such that if you offer a "Nothing to do" house at the higher end, you will get the well-healed buyer and they will pay good money for the convenience. But it has to be top-end.

Good houses which are run down struggle to sell; the cheap buyers can't afford them, and the well healed buyers don't want to move into a holiday house and start working.

At the time I began the reno, the house was worth around $650k - right in the middle of no man's land for a sale. Nice house, great views, but needed an uplift, and too expensive for a cheap holiday house for the average folk..

So, I spent 6 months and about $80k doing the reno, top-end everything and hire furniture for the selling campaign, to attract the higher-end buyers. It was an educated gamble.

It looked bloody awesome, and we felt like moving back in.

It sold for $850k. My $80k outlay increased the price by $200k. Now; that's a nice win, in my book.

So, while the previous owner made a profit, it doesn't mean that noone else can after that.