Off-the-plan units the riskiest of all property investments

When it comes to risk, off-the-plan units top the list for potential investment disasters, especially if changes to negative gearing and capital gains tax go ahead.

It’s a risk that’s compounded by a number of factors, says RiskWise Property Research CEO Doron Peleg, and includes equity risk, cashflow risk, and settlement risk.

“The first, and most obvious, is the risk of oversupply which is something we’ve seen in inner-city Brisbane which has created weakness in the market leading to lower valuations, rising defaults on settlements, major discounting, falling rents and ridiculous incentives to get buyers across the line,” Mr. Peleg said.

Brisbane City, Fortitude Valley, and South Brisbane have all been named in the Top 10 of the RiskWise 2018 list of the 100 Worst Off-The-Plan Suburbs in Australia, as have other areas in Sydney (eg Zetland and Epping) and Melbourne (eg Southbank) where oversupply of units is a huge issue.

He said the widespread oversupply issue was universally acknowledged by banks which had ‘blacklists’ for postcodes suffering potential unit saturation. In addition, lenders are scrutinising loan applications much more vigorously and either require a much higher deposit as security or they may turn down the application entirely.

“It must also be remembered that rental units and owner-occupier units are not fully substitute products. The dwelling types and needs of owner-occupiers are often greatly different from the dwelling types and needs of renters,” he said.

“Units that are used by owner-occupiers are larger than units that are typically used as rental properties and, more importantly, the price per square metre of rental properties is higher than the price per square metre of owner-occupied properties, especially in Sydney and Melbourne.

“This means that, overall, rental units in Sydney and Melbourne are significantly less affordable than units that are owner-occupied.”

However, Mr. Peleg said it was the potential changes to negative gearing and capital gains tax if Labor were to win the next Federal election, which was likely, that put off-the-plan units at their highest risk ever.

He said should the ALP policy be implemented there would be reduced demand to purchase rental properties due to the creation of primary and secondary markets, and this would cause new dwelling prices to decline in many regions.

“The transfer of the property effectively changes its status from the primary to the secondary market, from a taxation perspective, however, the same taxation benefits from a property in the primary market would not be available to a subsequent investor,” he said.

“In other words, if you buy an off-the-plan unit, and there are no changes to negative gearing, when you sell the property the new investor will have the same tax benefits of depreciation etc as the original owner, and so the fair market value will remain similar to both the buyer and the seller, as the financial benefits from the property are the same.

“However, if the changes go ahead, the new purchaser will not be able to claim negative gearing against their wages and the capital gains tax discount will be cut in half. Therefore, the vendor must drop the value of the property because the benefits to the buyers are lower, and it is therefore not as attractive to potential buyers.”

Mr. Peleg said unless there was phenomenal capital growth, the value of off-the-plan property in many regions was likely to be reduced and it would become significantly harder for investors to enjoy capital growth from many off-the-plan units, at least in the foreseeable future.

“And if you consider that many of the prices for off-the-plan units include a significant commission to the marketer, between 5-6 percent of the value of the property and sometimes even more, and with the current risks to settle the property … all of these things together make purchasing off-the-plan units in many regions in Australia extremely high,” he said.


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