Yet another Sydney off-the-plan development has been identified as shoddy – bringing the total number of new buildings with major defects to a staggering four in past 12 months. Off the plan Sugarcube-Honeycomb, Erskineville buyers have been locked out after fears the developer didn’t clean up the toxic land beneath the new complexes which were built on an old industrial estate contaminated with heavy metals, hydrocarbons and asbestos. .
They join other groups of residents also locked out of their Sydney apartments over safety concerns.
These furious buyers, who paid upwards of $1 million for one of the dwellings, are demanding answers with some having purchased off-the-plan as far back as early 2015. The Zetland, Mascot and Opal Tower apartments across Sydney have all been evacuated in the last 12 months due to major defects. In fact, according to studies by the University of New South Wales’ City Futures Research Centre, 85 per cent of high-rise buildings in NSW built since 2000 have had some form of defects. So, if you didn’t already realise it, this latest news is yet another reason why new apartments will always make poor property investments.
The thing is, I’ve said all along that new and off-the-plan apartments have always been bad investments – but it’s even worse now.
Coupled with under-par construction practices, the oversupply of new units means that capital growth has been minimal, at best, while rents are stagnating, if you’re lucky. To prove this point, analysis by BIS Oxford Economics reports that of the apartments sold off the plan during the past eight years:
- Two out of three Melbourne apartments have made no price gains or have lost money upon resale. And this is despite a record immigration and a significant property boom.
- In Brisbane about half these apartments bought off the plan are selling at a loss, or at no profit.
- In Sydney it is about one in four apartments bought since 2015 are selling at a loss, or at no profit.
New data from the Real Estate Institute of New South Wales has also found that for the year ending June 2019, Sydney saw a 0.7 per cent increase in vacancies, from 2.7 per cent to 3.4 per cent.
When vacancies rise, as you no doubt know, rents generally start falling because of more supply than demand.
On top of that, off-the-plan apartments are generally built for investors, often those overseas, who are simply chasing somewhere to park their money.
Local investors who buy, however, will find they own a unit that will struggle to attract long-term tenants because of its design and its size.
It will also never be attractive to owner-occupiers because of the same reasons, which means its capital growth will always be inferior.
That’s because owner occupiers drive up prices because of their emotional attachment to a dwelling that they are hoping to make their new home.
In short, off-the-plan apartments are investor stock – not investment grade.
It’s about to get worse
So, the situation we have now is a beast of its own making in my opinion. Developers went to town in our capital cities, rushing to build new unit developments, which they could flog off to investors or unsuspecting owner occupiers so they could simply move on to the next one. At the time, the construction boom was good for our economy post-GFC, but like anything that rises rapidly, there was always going to be a fall at some point.
Well, that moment in time is now.
If the oversupply wasn’t enough of a drag on that market, the continued examples of shoddy workmanship is just adding to the woe.
Overseas investors have virtually disappeared, and locals can add falling prices and rents as more reasons to stay away, dragging prices down even further.
While the argument is always that we need to build up, and not out, to house our growing population, the fact that many of these developments are inferior in every way will do little but create high-rise ghettos that people can’t sell in the future.
The smart investors, on the other hand, were never swayed by the snazzy brochures or well-lit promotional videos.
Instead they simply continued to invest in investment grade properties that will appeal to owner occupiers for the ages because of their uniqueness and superior location.
These are often still apartments - but usually established apartments - the type we used to call "flats" years ago - in quite streets but close to amenity.
The apartments were built solidly, have a sales history so you can measure their capital growth and still remain attractive to owner occupiers and investors
Not tiny units that have no buyer appeal or originality – and will wind up with no real capital growth either
Ahmad Imam is a director of Metropole Properties in Sydney, is a highly skilled wealth strategist and a passionate property investor. He has a degree in Commerce, is a licensed estate agent in both NSW and QLD and has personally coached and educated hundreds of clients to create wealth through property.
He is a regular commentator for Michael Yardney's Property Update.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.