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Investors warned against lure of buying off-the-plan

Patrick Bright
Investors warned against lure of buying off-the-plan

Property buyers should be wary of the high-risk investment temptation created by record low interest rates and an influx of apartment and housing developments across Australia.

The combination of last week’s rate cut and an oversupply of off-the- plan developments in many capital city locations just increases the risk of this type of speculative investment.

On the eve of the 2016 Federal Budget, the Reserve Bank of Australia lowered interest rates to 1.75 percent – the lowest in Australia’s history.

Also read: Why investment property is a waste of money

With any off-the-plan property purchases, investors should understand that they were buying a speculative investment that carries with it associated risks.

Anything that you buy with a delayed settlement is a risk and the longer the settlement the greater that risk becomes.

You’re punting on the fact that the market will go up.

If it goes down and it’s worth less at completion than the price you paid, then, when you go to finance that property at settlement you’re in negative equity.

If you end up in this situation it’s much harder to get the finance and if you can’t secure it then you will lose your 10% deposit.

Also read: The outlook for Australia’s property market

On top of this you need to be aware that if the developer then on-sells the property for less, they could also sue you for the difference for non-performance.

Off-the-plan contracts also heavily favour the developer and most include shrinkage clauses, sunset clauses, like for like clauses and many others that keep you tied to purchasing the property even though they can have a detrimental impact on the end value of the apartment.

Investors are better off buying established real estate as it offers a much lower overall risk.

Established real estate is usually in a better location and provides a more secure investment opportunity when compared to off-the-plan property.

You’re less likely to be competing with cashed up foreign buyers who don’t understand current market values and often overpay.

In addition, you can rent out established property immediately after purchase and receive a return on your money straight away rather than hoping to secure a return in a year or two.

Also read: What $1 million buys you in Australia's cities

Often off-the-plan properties, especially those built over the last decade, have been designed more as investment products for developers who want to sell quickly with a high margin rather than a quality product built to a high standard.

In comparison, I find apartments that were built in the 60s to 90s are generally in better locations and have more focus on space and outlook.

Patrick Bright is buyer's agent for EPS Property Search and can be contacted here.