New investment units risk
The property industry is awash with the promises of easy gains again, with salespeople promoting off the plan property deals, but caution is warranted, according to Pete Wargent, co-founder of Australia’s first national network of property buyer’s agents, BuyersBuyers.
Mr Wargent said, “when housing markets are rising, we tend to see the proliferation of spruikers recommending their ‘free’ services to investors. The model often involves a one-stop-shop of advisors recommending off the plan units or apartments to investors, sometimes with rental guarantees and other offerings included to encourage consumers to take the plunge“.
“For owner-occupiers and downsizers, a desirable new unit might be a perfectly desirable choice, but the sales pitch to investors is usually based around tax benefits and rental guarantees, and the model is flawed.”
“What is less promoted is that the advisor is remunerated by lucrative commissions from the developers selling the new stock. The problem is that we know that new units have systematically underperformed from an investment perspective, and when the investor comes to sell, there is an increased risk of loss on resale because they are then selling a second-hand property that has lost its shine and newness premium” Mr Wargent said.
“Non-residents may only be permitted to buy new dwellings, but Australian citizens are free to buy any property, so shouldn’t be constrained to looking at new units or properties that haven’t even been built yet. Depreciation allowances are useful but should never be a reason to buy a property, and rental guarantees are often a red flag. You should question why they are even required to get a property sold”.
Oversupply risk hotspots
Doron Peleg, CEO of RiskWise Property Research, said that some areas of the country are at risk of apartment oversupply due to the lack of immigration at present.
Mr Peleg said, “Statistically buying off the plan comes with more risks, including construction defects, pre-settlement valuations coming in lower than the contract price, and ultimately a statistically higher risk loss on resale. These risks are compounded if you buy into a potentially oversupplied market, of which there are some in all states”.
Suburbs at risk of unit oversupply
Mr Wargent of BuyersBuyers said that consumers should be wary of free advice and services.
Mr Wargent said, “if you’re not paying, you are not the client – someone else is. And that someone effectively pays for the marketing campaign and the advisor’s sales commissions, which are often surprisingly lucrative at more than 5 per cent of the contracted sales price”.
“To avoid major problems, focus on established properties. This carries a lower level of risk and is statistically more likely to provide you with greater capital growth. Do your own research, or if you can’t perform your research or find and negotiate on a property, then hire someone independent to work on your side with no conflicts of interest. If you can’t afford that, then improve your research skills, but don’t engage with a property salesperson or advisor who provides their services for free.”
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