60% of ‘off the plan’ apartments researched were sold above market value throughout 2015.
Our office is instructed to value hundreds of new apartments every year within the Melbourne CBD, Docklands, Southbank, South Melbourne and inner suburban localities. Of all the valuations undertaken throughout 2015 only 40% of new apartments purchased reflected market value, with a staggering 60% being over market value. The majority of valuations that were below purchase price reflected a loss of 5-15%, which for a $500,000 purchase is a loss of $25,000 to $75,000.
Why?
Foreign Investment Review Board – Foreign investors are not permitted to purchase established properties unless they are to rebuild with a new dwelling. The FIRB does though allow Foreign investors to buy ‘off the plan’ apartments as this creates local employment and stimulates the economy. Due to the high demand for Australian property from countries such as Singapore and China the majority of high density apartment developments are marketed overseas. The large demand from foreign investors results in a ‘premium’ paid to acquire ‘off the plan’ property. Once the apartment is completed and settlement occurs then the property is no longer marketable to foreign purchasers as it does not satisfy the FIRB requirement for ‘new’ property. The result of not being able to sell the property overseas once completed means that a large portion of the initial buyer pool is lost and therefore the reduced demand reduces the value achievable.
Stamp Duty Saving – When purchasing ‘off the plan’ stamp duty savings are available as the duty is calculated based on the land component only (excluding the proposed apartment). This is often reinforced by selling agents and the stamp duty savings are usually used as a marketing tool to secure a higher sale price.
Depreciation Benefits – They simply do not account for the large premiums being paid to acquire ‘off the plan’ property.
Time Value of Money – When apartments are sold in high density developments there may be multiple years before the development is completed and the property settles. Agents often spruik that the apartment will be worth far more upon settlement due to capital growth throughout the construction period. This is not always correct and there is a risk that values will fall throughout the construction period. The large volume of Council approvals for high density apartment developments may result in an ‘oversupply’ and therefore place downward pressure on apartment values.
Summary
It is important to note that whilst ‘off the plan’ apartments do have a high risk associated with them, there certainly are developments that are sold at market values. We recommend clients instruct a valuation before committing to purchase property, particularly ‘off the plan’ where failing to undertake sufficient due diligence can result in significant losses.