Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts

Monday, May 1, 2017

Brisbane apartment sales slow

The AFR on 27 April 2017 had a story on page 39 about apartment sales slowing in Brisbane and Melbourne.  "Slower off-theplan apartment sales in Melbourne and Brisbane have resulted in fewer projects staring construction, a sign the apartment markets in these two cities may have peaked."

The story says Brisbane is worse than Sydney and Melbourne.  "While it has 11,000 units due to be completed between late 2017 and 2022, current pre-sales of apartments have slowed forcing developers to abandon projects.  ... Only 52% of the 5,897 apartments currently marketed have been pre-sold."

There is good news.  "Despite many off-the-plan sales having extended settlement periods, this has not translated into substantial settlement failure across the market.  However, projects completed later int he cycle may be exposed to higher levels of settlement risk than those approaching completion."

Thursday, February 2, 2017

Brisbane Still Going Backwards

According to RP Data CoreLogic, Brisbane apartments did badly in 2016.  See report here.
Brisbane apartment prices (to 31 January 2017):
January 2017 - down 0.1%
Quarter - up 0.2%
Year on Year - down 2.7% 
Median price based on settled sales of Brisbane apartments over the quarter - $380,000

The report says:
Mr Lawless cites the large number of high-rise units currently under construction as another factor that may slow overall housing market performance. He said, “Dwelling approvals have already peaked across the high rise sector, as have construction commencements. However, the unit supply pipeline remains at unprecedented levels with a large proportion of these high rise units located within the inner city regions.”
“As these units flow through to settlement, the risk of buyers receiving a finance shock is becoming heightened.”
”Metadata flowing across CoreLogic valuation platforms is showing more than 40% of off-the-plan settlement valuations are coming in under contract price across the Melbourne, Brisbane and Perth unit sectors. While the large majority of these ‘under valuations’ are not showing a significant gap between the contract price and settlement valuation, more significant differences can be seen in some projects and precincts. Buyers who receive a valuation lower than the original contract price will generally require a larger than expected deposit in order to meet the loan to valuation ratio required by the lender.” 

Monday, March 7, 2016

Off the plan risks

Two stories in the AFR today are worth reading, both on page 33.

The first is titled "Industry warns of settlements failure".  It has a chart that shows that the average number of completed apartments in Brisbane for the period 2007 to 2014 was less than 2,500 a year.  For 2016, it is predicted to be more than 5,000 in the year.  For 2017, it is closer to 10,000, or more than 3 times the past average.

"The settlement risk will occur in places where prices are slowing and the market's getting harder."

"Banks are not only cutting back their LVRs, they are also taking a more conservative approach to valuing completed apartments, and in the case of at least one retail bank, this meaning between 15 and 23 per cent below the purchase price."

So if you are buying off the plan, and have paid a 10% deposit, you may need to stump up 40% of the contract price, because the Banks may only lend in effect 50% of the purchase price.

The second article is titled "Lenders nervous about incentives to apartment buyers".  It states:

"A recent survey by WBP Property sowed nearly half of the off-the-plan sales in the eight months to last August were in negative equity, which means worth less than the purchase price."  And this does not take into account transaction costs, such as stamp duty.

Thursday, January 21, 2016

China limits cash moves offshore - danger for property settlements

A story in today's Australian Financial Review is titled "China limits cash moves offshore" and show the risks for developers in relation to off-the-plan sales contracts.  The Chinese buyer may not be able to get the cash out of China, and then may not be able to settle the contract on completion of the building.  And try suing the Chinese buyer.  Some buildings under construction in Brisbane have more than 80% offshore buyers, so I suspect that some developers may run into troubles next year.

China limits cash moves offshore
AFR, 21 Jan 2016, p1

Shanghai | Chinese banks are delaying and even blocking some foreign exchange transactions under a decision by the central government to limit capital leaving the country, a move that could hurt demand for foreign assets including Australian property.

At meetings on Monday and Tuesday afternoon senior bank executives were told by the government to toughen up their capital controls.

While they haven't introduced new rules, one executive told The Australian Financial Review banks were using existing measures to slow the amount of money going overseas. The crackdown has seen more stringent checks for both companies and individuals.

"We are now refusing all foreign currency transfers where the documents are not fully complete … previously the requirements were not so strict," said a bank executive in Shanghai who asked not to be named.

...

An Australian real estate agent based in Shanghai, Scott Kirchner, said the tougher capital controls could "cause problems for Australian developers as clients may not be able to get their money out of China".

"I'm advising people not to sign a contract unless they already have their money outside China," said Mr Kirchner, a director of BellerChina. "There is lots of uncertainty at the moment and that might affect sales."

In China, individuals are restricted to exchanging the equivalent of $US50,000 in foreign currency each year.

American lawyer Dan Harris said on his blog on January 14 that his firm's China office had received more "money problem" calls in one week than it had received for the whole of the past year.

"If there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars," said Mr Harris from Seattle-based firm Harris Moure.  He said it had affected real estate agents and companies waiting for Chinese investment money.

Previously, one option for those interested in buying overseas property was to use the currency quotas of friends and family.

Alternatively, underground channels in Macau or Hong Kong were available to get money out of the country. Both these methods are now under increased scrutiny as the government tries to stabilise the yuan.

"They haven't introduced any new capital controls but the implementation of existing measures has been strengthened," said another executive, who works at one of China's big state-owned banks.

David Olsson, a China Practice Consultant at law firm King & Wood Mallesons, said Chinese banks "have clearly got some direction to look more closely at outbound capital flows particularly around Shanghai and Shenzhen".

He said it was not expected to affect legitimate outbound investment and Australia would continue to be a big beneficiary of Chinese investment in agriculture, services-related sectors and tourism."

Saturday, August 2, 2014

Meriton Soleil Resales - Some up, some down

It is interesting to see how resales have gone for off-the-plan purchasers in Meriton's Soleil (501 Adelaide St, Brisbane).  Some original buyers have profited, and some have lost.  I am not convinced that the risk in buying off-the-plan, when you can't see the view or quality or feel of the apartment, is worth it, when it seems that there is a good chance that you can buy the same apartment when complete for less.

Apt 5304 - Sold off-the plan in June 2009 for $543,000, resold in June 2014 for the same price.  This is a loss, because of stamp duty and agent's selling fees.

Apt 2403 - Sold off-the plan in August 2012 for $493,725, resold in April 2014 for $525,000.

Apt 5505 - Sold off-the plan in August 2009 for $669,240, resold in April 2014 for $600,000.

Apt 5604 - Sold off-the plan in November 11 for $586,000, resold in April 2014 for $565,000.

Apt 4404 - Sold off-the plan in April 2012 for $485,000, resold in April 2014 for $572,000.

Apt 4004 - Sold off-the plan in March 2009 for $502,000, resold in March 2014 for $570,000.

Sunday, March 2, 2014

Soda Goes Soggy

It has been reported recently that the Soda apartment development in South Brisbane did not receive development approval from the Council.  Although 129 out of 131 have sold off-the-plan, the developer had not obtained development approval to build the building.

A newspaper report states that the apartments do not have sufficient ventilation, ceiling heights are too low, and there is not enough visitor car parking.  "The only outlook of many of the habitable room windows would be to a (future) adjoining development in very close proximity."

Well-known property law David Colenso said:  "Contracting 98% of apartments without a development approval contravenes all the basis risk parameters of property development.  Judging by the extent of councils refusal, this developer may need to redesign the development which puts at risk all contracts under Queensland's disclosure regime."

When I looked at this development in October, I thought that it was expensive.  It now looks to be very expensive, due to what appears to be poor quality design.

Investors buying off-the-plan should look at the checklists and information in this book.  Ceiling height, aspect and cross-ventilation are important to consider, and are often not disclosed in the glossy sales brochures.

Saturday, February 1, 2014

Aria's South Brisbane Bet

The AFR on Thursday (30/01/14, p.38) had a full page story about Brisbane apartment developer, Aria.  Some highlights:
  • Aria has sold 188 apartments in three residential towers it has completed in South Brisbane since mid-2012.
  • It has a 20 storey tower under construction on Grey Street.
  • It is about to start another 20 storey tower of the corner of Edmondstone and Boundary Streets.
  • Aria owns a dozen more sites in South Brisbane.
  • South Brisbane is catching up to Bowen Hills and The Valley for residential apartment development.
  • The change is due to construction of office towers, bring 10,000 workers to the area.
  • Residential building approvals have jumped from 151 in 2010/11 to 744 in 2012/13.
  • Gross rental yields are said to be 6%.
  • Prices for Aria's apartments are $7,500 to $8,000 a sqm, and are likely to rise.
  • Aria has lodged a DA for a 26 storey tower on Hope Street that will have over 180 apartments.
  • Aria pays interest on deposits for off-the-plan apartments.
  • 75% of Aria's clients are investors, with fewer than 10% being SMSFs.
  • Half the buyers are from SE Queensland.
  • There are more than 4000 apartments under construction in inner Brisbane.  The biggest supply potential is in Brisbane's North Eastern area, around Bowen Hills and The Valley - this is seen as a risk.

Saturday, November 2, 2013

Buying of the Plan

At present, it seems that off-the-plan apartment developments are overpriced, and buying off the plan carries significant risks.  A series of commentaries in Property Observer discusses this issue.  See also this Kindle Book for more detail.  My recommendation is to look at existing apartments, rather than off-the-plan apartments.  The off-the-plan market appears to be fuelled by foreign investors, who are required to buy new properties under FIRB rules.

Sunday, July 28, 2013

Off-the-plan apartments overpriced

A story in the Courier Mail yesterday:  "Bank revaluations hit apartment buyers".  Some extracts:
  • Buyers of off-the-plan apartments are reporting that banks are revaluing their properties once the buildings are completed and only lending a lesser amount.
  • "The difference between the price paid by a property buyer and the bank valuation is often high, over 20%, and the differential is spreading.  Many off-the-plan purchases are made at prices significantly above true market price.  On completion, it is not uncommon for valuations to come in at least 10 to 15% below the contract price." said Michael Yardney.
  • The problem arises in two ways:  the buyer initially pays too much and the property declines in value during the construction period.
  • "As a general rule, off-the-plan will go down in value as soon as it's built." said Mr Roylance, director of iProperty Plan.
  • In this situation, the lender will usually provide a loan at 80% of the valuation, not 80% of the contract price.

Sunday, July 21, 2013

Festival Towers lawsuit

Many owners of apartments in Festival Towers in Brisbane, and the body corporate, are suing Devine Limited and Brookfield Multiplex Constructions for a large amount of damages concerning the construction (and alleged construction defects) in Festival Towers.  Details of the lawsuit can be found here on the Supreme Court website.  I have been told that there have been special body corporate levies to partially fund the lawsuit.

Any prospective purchaser should have their lawyers study the lawsuit paperwork, including the schedule of defects, in detail.

At the time of development and construction of Festival Towers, Devine Limited was run by David Devine, with Ken Woodley as the senior person on the sales side.  Devine and Woodley are now running Metro Property Group, which is a marvellous sales machine.

Festival Towers, managed by Oaks, doesn't have the greatest feeling in my view.  Partly short term accommodation and partly foreign students (packed into small apartments, and sleeping in hallways and living rooms), and a popular place for travelling hookers, Festival Towers has always disappointed me.

In my opinion, purchasing apartments off-the-plan has risks, because you don't know the level of quality that will actually be delivered.  The sales contract is most often in the developer's favour.  In a number of circumstances, I have seen glossy brochures inferring high quality, but the product that is delivered is low quality.  For this reason, I always take that view that off-the-plan pricing should be less than current market pricing to take into account this risk.  Unfortunately, most developers are selling apartments off-the-plan at prices that are higher than you could buy an existing similar apartment -- the only difference being age.

An agent I spoke to recently who was selling off-the-plan informed me that his competition was not other new developments, but resale apartments in recently finished buildings by the same developer.  He said the price of the resale apartments was about 15% less than his almost identical new, under construction apartments.  And buying an existing apartment is way less risky than purchasing off-the-plan.

Sunday, June 9, 2013

BOQ warns about one bedroom apartments

"Bank of Queensland is worried about a surge in people borrowing money to invest in small apartments, citing Brisbane and Melbourne as concerning spots.

Of particular concern was self-managed super funds (SMSF) engaging in the tactic, BOQ CEO Stuart Grimshaw said.  He said the assumption was these one-bedroom apartments would appreciate in value, but it was  a "risky part of the market" for heavily borrowed SMSF funds.

"I don't think it's long before ASIC will start looking at some of the sales methodology," he said."

Source:  Courier Mail, page 77, 8 June 2013.

Be warned!

Friday, April 19, 2013

As safe as houses?

"If it's profitable and seems riskless, it's a business you don't understand."

Saturday, September 1, 2012

Meriton's Soleil - original buyers under water

I have re-looked at Meriton's Soleil apartments, now that they have finished.  If you like high apartments with great views, then the upper floors are for you.  The two bedroom apartments on the higher floors are nice apartments.

Positive aspects:
  • good floor plans
  • reasonable size (87 sqm internal)
  • includes blinds
  • floor to ceiling tiles in bathroom
  • bath and separate shower
  • linen cupboard
  • floor to ceiling windows with fantastic views
  • good ceiling height
Negative aspects:
  • building also used as short term stay "hotel"
  • lobby includes hotel check-in desk
  • only 3 elevators to upper floors
  • no balcony
  • indoor pool, shared with hotel guests
  • no central air con -- head-end on apartment wall
Pricing at present for a two bedroom on higher floors is in the $615,000 to $650,000 range, with stamp duty rebated, plus other offers available.

Looking at settled sales, it appears that off-the-plan purchasers paid more for similar apartments than those currently for sale.  But it is hard to tell, because the developer has rent guarantees, discounts, rebates and cheap vendor financing.  Looking at the 01 floor plan on the higher levels (which is a good 2 bedroom floor plan):

Apt 5001 - sold in 2012 to interstate investor for $635,000 
Apt 5101 - sold in 2012 to owner occupier for $650,000
Apt 5301 - listed for sale at $627,000
Apt 5401 - sold in 2012 to Brisbane resident for $599,000
Apt 5501 - sold in 2009 to Queensland investor for $790,000
Apt 5601 - sold in 2009 to Brisbane resident for $759,000
Apt 5701 - sold in 2012 to owner occupier for $670,000
Apt 5801 - sold in 2011 for $837,500
Apt 5901 - listed for sale at $631,000
Apt 6001 - listed for sale at $636,000
Apt 6101 - sold in 2009 to foreign investor for $829,000
Apt 6201 - sold in 2009 to foreign investor for $834,000
Apt 6301 - sold in 2009 to foreign investor for $843,000
Apt 6401 - list for sale for $651,000

Shows that there is a big risk buying off the plan, with some investors now $200,000 behind.

Saturday, August 18, 2012

Off-the-plan risks

An interesting article Off-the-plan properties are a risky acquisition.  This article has some good information, but it is focused on the southern States.  For a Queensland perspective, have a look at the Kindle Book (also available on Google Books) Buying An Apartment Off the Plan in Queensland.

Sunday, August 5, 2012

Uncertainties, Risks and Body Corporate Fees

I feel that now is probably a good time to buy an apartment in Brisbane.  Prices are down, and there are many good apartments for sale.  However, there are uncertainties that are holding me back:
  • What will happen if the mining boom comes to an end?
  • Will Newman's retrenchment of 20% of the public service kill any chance of growth for the next 3 years?
  • Will Newman increase land tax rates and lower land tax threasolds in Queensland?
  • What will Newman and the Attorney-General do in relation to the complex issues regarding lot adjustments (that impact the percentage of body corporate fees an individual unit owner will pay)?  If I buy now, will the unit entitlements be adjusted up in the near future so that my body corporate fees will increase?  Will there be costly legal action between the body corporate and various interest groups in the buildings.  See here and here for example.  Changes to this are a priority for the government it seems, to reward penthouse owners for voting for the Liberal party.
So, for the time being, there is too much uncertainty and risk to buy an apartment (or an investment property) in Brisbane or Queensland.

Regardless, body corporate fees and council rates are becoming prohibitively high, and make investing in apartments less attractive.

I looked at an older apartment on the river recently.  It has been on the market for more than 6 months.  It is a 2 bedroom (with a small second bedroom), with river views.  The facilities are moderate -- no doorman, onsite manager, reception desk or the like.  The list price has come down, and is now $455,000.  But the body corporate fees are $8,830 a year, and council rates are $2,000 a year.  So more than $10,000 a year in these expenses.  The rent for this apartment would be about $400 a week, or about $365 a week after real estate agent's fees.  So that is 30 weeks, or more than half a year's rent, just to cover body corporate levies and rates!  Clearly, this is not a good investment, even if the price drops another $100,000.

Post-script -- comment from a reader after this post was published:
Your sentiments re purchasing a unit or apartment in Brisbane reflect my own also, very valid points.
Another is upcoming or planned or approved “future” capital works such as painting, under-pinning, structural repairs, landscaping, tree removals and the like. At a number of units I have looked at, the agents got very cagy when put the question. Pressing one very hard got I wind of a complete paint job coming up within 2 years,  approx $250,000k across 80 units, and unit titles re-appropriation may also make some owners rather unhappy as well. Ouch! Another had $30,000K in quotes not yet voted on (but very necessary since drains were becoming repeatedly blocked by roots) for tree removal. Ouch!  Many units 10 years and over now need a lot of work, much of which has been delayed or put back but  it’s coming. New buyers beware.
Article in AFR, 7 August, P38: Newman at a get together of banks and bizo’s was playing pretend Reserve Bank Chief and instructing banks to start lending. Banks won’t (as we all know), denying they should take risks just for Newman et al. Last para of article states : At a meeting of people from the big four banks recently, one person from one of the big four proclaimed  “We’re not lending anything into Northern Australia. Northern Australia begins at Nundah in Brisbane.”

Saturday, August 4, 2012

South Brisbane Apartments

There are two large apartment buildings currently in presales in South Brisbane.  One is Metro's The Plaza development.  The other is Pradella's Canvas.

The Plaza is 12 levels of one and two bedroom apartments, priced up to $575,000.  It is on the corner of Russell and Manning Streets.

Canvas is located on Boundary Street, and has 141 one and two bedroom apartments.  The one bedrooms start at $346,000 and the two bedrooms start at $538,000.  The one bedrooms shown on the website are small -- 44 sqm internal plus a 10 sqm balcony.  This is about the size of a hotel suite.  The two bedrooms range in size (internally) from 76 to 82 sqm.  They are lower quality apartments, with the air conditioning compressor on the balcony for example.

To get a good idea of how small these apartments will be, have a look at a prior Pradella project in South Brisbane -- Allegro.  Some details about Allegro are here, and video here.  Go and have a look before you buy off the plan, so you can see what a small apartment is like.  Apt 96 is for sale for $410,000, and it has two bedrooms.  Apt 72 is two bedrooms with city views, listed at $420,000.

Or you can buy a top quality 2 bedroom apartment today in Saville South Bank, for $500,000 to $540,000.  Saville is in a better location than The Plaza and Canvas, and is a much higher quality build than Allegro.  Apt 1115 is a two bedroom listed for sale for $529,000, and it is 85 sqm internal with a 10 sqm balcony.  I could be wrong, but this seems to me to be a much better buy than a smaller, lower quality apartment in Canvas which is more expensive, and has the added significant risk factor of buying off-the-plan.

Wednesday, December 21, 2011

Risks of Buying Off the Plan

Property commentator Michael Matusik published some articles recently about the risks of buying of the plan.  See:
Risks 1 to 3
Follow Up Comments

For a more detailed analysis, see the recently published Kindle Book: Buying An Apartment Off The Plan in Queensland - A Guide For Successful Buying.  
This book can be downloaded to a Kindle, iPhone, iPad or computer.  The cost is less than $10, so good value if you are planning on spending money on an apartment in Queensland.

Tuesday, June 7, 2011

Joye's Myths

An extract from an article by Chris Joye:

"A third myth is the popular claim that luxury, or more expensive, properties outperform cheaper ones. This is just not supported by the empirical data. Analysis produced by Rismark proves that mid-priced homes have actually delivered stronger capital growth than their dearer counterparts. And this also comes with considerably lower risk.

The luxury end of the market is “illiquid” – that is to say, it only attracts, by definition, a small number of buyers and sellers – and is afflicted by far greater risk or volatility. This is highlighted by RP Data-Rismark’s luxury property index, which is denoted by the red line in the chart below. Observe how during 2009 and 2010 the most expensive homes outperformed the broader market. Yet during the recent soft-landing, it has been this same cohort that has tanked, relatively speaking. ...

My sixth myth is that Australian house prices are massively overvalued and set to fall by 20 to 40%. You may recall that my regular sparring partner, associate professor Steve Keen, famously predicted in 2008 that Aussie house prices were “going to fall by 40% or so in the next few years.” Well, he could not have been more wrong. Dwelling prices in Australia’s capital cities are currently 30% higher than their March 2008 peak, just prior to the GFC hitting our shores.

Put differently, dwelling prices are nearly 70% higher than where Dr Keen expected them to be. My other mate, the economist Rory Robertson, challenged Dr Keen to a bet on this note, which the latter lost. As a result, Dr Keen ended up walking from Canberra to Mount Kosciuszko wearing a T-shirt exclaiming “I was hopelessly wrong on house prices” (or something to that effect). ...

Property Observer

Thursday, April 21, 2011

Off-the-plan apartment risks

I have previously written about the risks of purchasing off the plan apartments. See this post for example. Others have also written about these risks. See this article for example.

The May edition of Australian Property Investor had a good story about the oversupply of inner city Melbourne high rise, which is also worth reading. See "High on High-rise". One point made is that many of the apartment buildings planned for Melbourne are aimed at being sold to investors, not owner occupiers. This is resulting in the wrong type of apartments being built and the article predicts that these apartments will not grown in value.

A similar issue is revealed in a story in The Australian today regarding Meriton apartments. Meriton is currently building two very tall high rise apartment buildings in Brisbane, Soleil and Infinity. Meriton reports that sales have mostly been to Chinese investors, who have stopped buying. Meriton says that it is Chinese investors who purchase most of the off-the-plan apartments in Australia. There is a clear risk in buying an apartment as an investment in such circumstances. As I have previously written, it is best to buy in a building where there are a large percentage of owner-occupiers in the building.

"Mr Triguboff said prices in the overheated Chinese property market were starting to fall, while the Australian dollar continued its stellar run, making Australian property increasingly expensive compared with China.

"Our (real estate) market is the Chinese market, just like coal and iron ore," Mr Triguboff said.

"We need lower interest rates so that our dollar drops and it stimulates growth."

Mr Triguboff, whose Meriton Apartments builds more than 1000 units a year, said Chinese owners and investors had accounted for about 75 per cent of Meriton sales for the last two to three years.

But in the past month, numbers had fallen steeply. ..."