A recent report into the real estate property development market has shown that a significant number of property investors have made losses on their investments purchased off the plan. The QLD Property Supply Report has catalogued the total number of development approvals, sales and completions from 2015-2019, including any subsequent sales of stock originally developed during this period.
Results from this study have shown that in 30% of the cases of follow on sales, off the plan (OTP) stock would sell between 5-15% below the previous registered sales price, 50% sold between 5% to 0% of the original sales price and less than 10% sold for prices higher than their original price sold when being developed. This comes at a time when house prices in the same geographic market have on average seen prices increase by 15% over the same time period.
Greg Murphy, an experienced real estate agent running his own agency GM Real Estate (website), says that these core figures don’t give the full picture. “just off raw sale prices you can see how many investors are losing out on buying certain types of properties, but when you factor in all of the holding costs, purchase and sale costs they’re likely losing significantly more”. With some unscrupulous marketers pushing inflated rental returns, speculative price growth and tax benefits from depreciation a lot of mum and dad first time investors get caught out. More from Greg: “In the current regulatory environment unfortunately there are a lot of unqualified marketing businesses which are providing services which some unaware buyers may think is investment advice, when they’re getting sold properties with overinflated prices.”
The OTP market has been suffering under an increasingly bad name for low quality stock in developments with limited demand, whilst allowing OTP sales people to receive large commissions (or even set their own commissions by increasing the prices above the recommended price). This in many cases leads investors stuck with a property they will struggle to have finance approved on or be required to put in substantially larger funds at settlement.
The banking industry has cracked down on lending with these types of properties, with property valuers valuing end properties significantly below their original contracted price and leaving some investors potentially in negative equity positions. This has resulted in some lenders refusing to finance OTP purchases, or limiting their exposure in any one development to manage the risk of falling values impacting their lending safety margins.
So what can you do to manage your risk of buying a dud property? Greg has some advice. “You need to do your own research with any purchase, including how much real demand there is for the type of property you’re purchasing, are there more developments like this coming on line which will create oversupply and reduce your end value. If anyone is pushing you to make the purchase or providing advice you should ask yourself how they’re being remunerated – if you’re not directly paying for the advice and they will make a profit from you making the purchase you have to balance their advice against that potential conflict of interest.”