Buying Off The Plan | Teal Talking Property – Episode 1

17 Oct 2017

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Welcome to Episode 1 of Teal Talking Property. We intend to podcast every fortnight, and sometimes you’ll hear from me, sometimes you’ll hear from other staff members, and we might have some guests from time to time. It’s really a lighthearted look at the hot topics of the real estate world and other factors influencing property prices.

The first topic that I thought I’d like to discuss is pricing of ‘off the plan’ apartments. And pricing of properties ‘off the plan’ is on the methodology of dollar per square meter. You look at a plan of a building projected to be completed in one or two years, and it will be 80 square meters and it will have a price of $8000, for example, or $10,000 per square meter. And so a 90-square meter 2-bedroom apartment with a balcony probably be up high in a multi-story building at that price will be around $800,000, and you’ll put down $80,000 deposit and expect to be in there in 2 years time. So the belief has always been that there will be stamp duty savings and that doesn’t occur now with a change in the state government ‘off the plan’ stamp duty regulations from July 1, 2017. But there’s also a belief that over time there will be growth in the sale price. Now a lot of the sales ‘off the plan’ are conducted by financial planners and companies that specialize in large ‘off the plan’ sales, where they get up with the financial modeling to provide to a buyer the negative-gearing benefits, the rental benefits of depreciation schedule to effectively make it really attractive to become cash flow neutral, and in some cases cash flow positive, but along the way selling the concept of you’re going to get some large negative-gearing benefits to reduce the tax that you’ll pay on your income.

So the bottom line there is you have a methodology of dollar per square meter. The day you settle say in two years time, and you come to the marketplace, typically we are finding that you might have been told you would get $600 per week week rent, the vacancy factor of ‘off the plan’ properties is significantly greater than people believe because normally there is a flood of properties. There might be 40 properties in a development, and those 40 properties hit the for rent market on the one day, and so there is this take up in the market that might take 4, 6, 8 weeks before they are fully let, so you have a vacancy factor sometimes. But more than anything, what we are finding is the numbers that people are being given, when they originally bought of $600 per week, does not translate into the reality of the marketplace. It didn’t back then and it certainly didn’t in the two years until you’ve settled.

And we’re finding that sometimes these are renting for as much as $100 per week less, say $500 per week rent, and that people are really concerned about the vacancy factor and about the lower rent that they’re getting and the financial modeling is not working. So they come to us and they say, “What’s my property worth?” And we’ll go and value it, and this is where the dilemma starts. Because the valuation process that we…or the estimated value process that we work on is different to what people used to buy the property in the first instance. They used dollar per square meter, and that will never ever be used again in the estimated value in the sale price for the property.

The secondary market, which is what you have now entered by going to sell property you purchased ‘off the plan’, uses a comparable sale method. So we compare this particular 80-square meter 2-bedroom apartment that you have purchased for a lot of money against all of the other sales in the local marketplace because that is where the market will be. And quite often we’re talking sums of money significantly lower than what people had paid two years earlier, and this is a real concern. And I don’t know the percentage, but if pressed to ask what percentage of the marketplace may well be trapped in their purchase, it could be as high as 20% or 30% of apartments in the suburbs where people can’t afford to sell out because they can’t afford to repay the bank what they owe, they have no extra capital to top up what the bank might require, they don’t want to lose their initial capital of $100,000. It’s hard earned money and they don’t want to lose that.

So it’s quite often the case where they will stay entrapped in that apartment because it’s easier to come up with another $100 or $150 per week to maintain that investment than it is to sacrifice the loss of your $100,000 import of your capital at the start, or even more if you owe the bank more than $650,000 or $700,000. I’m finding that people haven’t got the money to repay the bank, and so it’s easier to stay ‘trapped’, that’s my terminology, within the investment, and hope that by paying out a small amount each week have a bigger negative-gearing loss but pay out a small amount each week that, in time, you will get to the end where property prices rise and you’ll get it up to at least square and be able to extricate yourself out of that investment, which brings me to another topic of the vacancy factor of apartments.

And there is an enormous amount of discussion on the radio, and sometimes it’s in the daily papers and on TV, but it’s all about the influx of money from Asia and what that is doing to property prices. And there are two different topics here. One is to do with the property prices of where the Asian money is coming in, where they’re obliged to knock a home down and rebuild within two years. That’s mainly on the eastern and southeastern side of Melbourne. But the ‘off the plan’ sales, there is said to be some buildings in the CBD that are 100% funded from overseas and 100% sold right to people from Asia. It might be from Kuala Lumpur, you got Manila, Singapore, but mainly from Hong Kong and China. And that influx of money, as I said, predominately from China is saying…well, last night I heard on the radio, 25% of apartment sales in Sydney and as much as 20% in Melbourne to Asian money.

And it’s my opinion, once again, Brad’s got an opinion, that a lot of these sales, if not all of them, are therefore foreign exchange sovereign risk investment, not property prices. So they’re not interested in buying a property for $600,000 in the Docklands and hoping that it’ll be worth $800,000 in a couple of years or get a rental income of $25,000 a year out of it or $20,000, whatever the rental income might be. It’s not about that at all. What they are doing, in my opinion, is securing their capital by bringing in half a million dollars offshore, putting it into a two-bedroom apartment at Docklands, or Southbank, or in North Fitzroy, wherever it might be, and in five or ten years it’s always going to be secure. So they have made their money secure by putting it into a very safe country where property prices may or may not be in a bubble, who knows.

But that’s my opinion of what is going on, because the risk of having an investment with no income doesn’t make sense, and why is it that you look at Docklands and it’s a full wall of black apartments at night, no lights on, and they say people check water meters, and as much as 50% in some buildings the water meters haven’t ticked over even once in the last 12 months. I mean, this is all anecdotal, but it’s my opinion that there has to be a reason for it. My rationale is that it’s the protection of their money that in their particular country, there is risk that in a click of a finger that money might be worth half or nothing in time with political regimes coming in and out and fluctuating currencies. So they get the money into Canada, Vancouver, over there is similar, Brisbane, Sydney, Melbourne, Johannesburg. They get it into capital cities of major countries that have strong stability in politics. You would laugh at that probably as we sit here today with what goes on with the Australian government. But in world terms, we are very stable and our banking system is strong, we have low interest rates, we have strong property growth, and that’s what I believe is at play here with the reason why so many people buy ‘off the plan’ and use their money from overseas.

So there are a couple of topics. I’ve run out of time on this particular podcast to discuss issues of the effect of the influence of overseas money coming in, where you get these burgeoning price, what they call the head and the tail of the dragon on the other side of Melbourne from where I sit here in Essendon, and the inflation that has occurred over there and the effect on rates, local rates, and on land tax, and generally genuinely talk about what impact that has on a local marketplace as well.

So, in summary, we’ve talked about the two methodologies of processing. One is the comparable sale method and the one ‘off the plan’, which is dollar per square meter, and then finally I talked about the influence of Asian money coming into the Australian property market and the effect and the rationale behind that. So I hope you’ve enjoyed these last 10 minutes and that we look forward to speaking to you on a fortnightly basis. But if ever you have any questions about property don’t ever hesitate to call one of the Brad Teal real estate offices for the Northwest of Melbourne, and I thank you for listening.