Smart investors know that if it looks too good it probably is. That could be the case with off the plan purchasers but if you are going to buy off the plan, in today’s show Shannon Davis, from Metropole Property Strategists, explains how best to do that.
Kevin: I was on a plane recently and overheard a conversation. Someone was talking about how they had made a lot of money out of real estate, and the way they had done is that they specialized in buying properties off the plan – this is before they were even constructed or even started construction – and because the developers had to pre-sell a number of the apartment blocks, they were quite prepared to discount the first few just to get some numbers up so that the banks would feel good about it. He was getting an automatic discount at the front, and he would then on-sell them several years later, given the fact that the market would move forward.
That may have been okay a couple of years ago. I wonder what that strategy is like today. It’s a conversation I want to have with Shannon Davis from Metropole Property Strategists, who looks after the Queensland side of the business.
Shannon, thanks for your time.
Shannon: No worries, Kevin.
Kevin: Not a bad strategy, maybe 15, 20 years ago, or even 10 years ago, but does it work today?
Shannon: Well, if you get to put a small deposit down and the market does its thing in the meantime, and you settle two years later in a rising market, then sure, that’s a great strategy.
What we’re seeing more recently, though, is that maybe the concentration, the size of the developments have been a little bit bigger, and sometimes the developer can actually be your competition. If people put down a small deposit, their circumstances change, and the developer is selling off stock at the same time as maybe they want to sell off – shortly after completion – therefore, that discounting actually is a bad thing for the investor.
Kevin: Yes, it pulls it back down. That strategy I talked about at the start is okay if – as you said – you get in on a low deposit and you can actually achieve a discounted price, and then assuming that the developers sell all the stock on completion, you may be able to turn it over. But as you said, you could be in competition with the developer.
Shannon: Yes, that’s right – and any other investors who have had a change of circumstances. And especially if it hasn’t gone the right way, no one wants to settle on a property that’s worth less than what they were wanting to buy it for. I think this is news right now for people in Brisbane, Perth, and Melbourne because we’re starting to see in the CBD areas a bit of an oversupply in those capital cities.
Kevin: If someone wanted to buy off the plan, what should they be doing, what sort of due diligence, Shannon?
Shannon: I think floorplans are really essential. Some of them are just too poky – say, under 70 square meters for a two-bedroom unit or under 50 square meters for a one-bedroom unit. But you need to remember you’re paying the full cost of construction, your land ratio in that investment isn’t that much, and you’re predominantly with a lot of investors rather than owner-occupiers.
My recommendation is to probably look for something nearby, something that’s comparable but is existing, and you’ll probably find a lot better value.
Kevin: What sort of pressure is this going to put on developers? As I said at the outset, in many cases, they have to get a certain number of sales up before the bank will even fund the project. Therefore, there has to be a bank of people who will invest in these properties.
Shannon: Yes, definitely. They’re mainly looking for the tax deduction of buying new. Maybe there’s the First-Home Owners Grant with it, as well. But I think buying for tax deductions, rebates or incentives like that is a poor reason for investment.
Developers won’t want you compare to the existing market – they’ll say that it’s different because “It’s in this precinct and we have this rooftop pool,” and everything like this – but if you compare a two-bedroom unit that’s new and off the plan to what’s in the same suburbs that’s existing, sometimes there is a big disparity in price, and that’s something buyers need to be aware of.
Kevin: What you’re saying – bottom line here – is that you don’t like off the plan purchases; you’d much rather look for something more established, close by.
Shannon: Yes. It’s better land ratio in the investment – over time, you don’t pay for the cost of construction; the land rises – and often they’re more generous in scope, size, and visitor parking, and you can add value. There’s very little value you can add to a brand-new off-the-plan apartment.
Kevin: I read some statistics just the other day – just in closing – too, that quite staggered me about the number of people who are now investing in properties both for investment and also to live in.
I think the figures were something like 25% of all properties in Melbourne are now units, over 30% of all properties in Sydney are now units, but in Brisbane, we seem to be lagging behind in that market because only about 8% of all the properties in Brisbane are units.
Does that mean that we’re going to be seeing more units come into that market if we’re going to follow those trends, Shannon?
Shannon: Yes definitely. The new town plan keeps Brisbane mainly as a low-density cap city, but there are lots of areas of higher density around transport modes and shopping precincts. Where those areas are, there are going to be a lot more balconies rather than backyards. It’s just going to be something that Queenslanders and Brisbanites will have to get used to.
Kevin: Always good talking to you, Shannon. Thank you very much for that insight. Shannon Davis from Metropole Property Strategists in Brisbane.
Thanks for your time, Shannon.
Shannon: No worries, Kevin. Thank you.