Building Defects: What Does It Mean For Property Investors?

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Since first being evacuated in December 2018, the Opal Tower in Sydney Olympic Park continues to experience the effects of the aftermath, with the Australian Financial Review reporting that the building’s insurance premium has risen to $2m. Coupled with the most recent turn of events at Mascot Towers – which remains uninhabitable due to structural risks – buyers and investors have started to show first signs of veering away from the sky-high, with others looking at every avenue in which to protect themselves.

As Your Investment Property delves into the topic with Sharon Fox-Slater, managing director of EBM RentCover, we discover that whilst there are certain safety barriers in place to protect the investor for a limited time, there is still a lot of ground that needs to be covered in the wake of recently developed concerns.

Fox-Slater says that the Opal and Mascot Towers incidents have ultimately revealed the vulnerabilities of builders and developers, and a lack of protection for buyers who invest in these property types.

“While the root of the issue is unclear, it is clear these defects aren't maintenance or repair issues,” Fox-Slater says.

“They are problems that are likely to have arisen on the back of construction, design or supplies. And while the defects may be triggered by the original construction phase or design, we are seeing the defects are actually arising later in the building’s life.

“This means some of these people who have invested hundreds of thousands of dollars buying their first apartment or dream home, now steer down a path of financial uncertainty as the value of their property nose-dives and they may have to fork out for expensive repairs.”

Fox-Slater adds that many defects can be difficult to uncover, and it can take many years for the implications of a defect to be fully brought to the fore; providing another problem for the investor.

A leading specialist in landlord insurance, EBM RentCover is currently assisting a number of clients who have become entangled in the financial set-backs brought on by the Mascot Towers incident, and according to Fox-Slater, it’s common for landlords of strata complexes, such as high-rise apartment buildings, to be confused by “who is responsible for what when it comes to insurance”.

Despite the heightened discourse taking place, which has also worked to bring to the fore some of the finer details of building insurance, the repercussions of recent events continue to seep, diminishing consumer confidence.

In fact, as general manager at Thrive Homes, Patrick Eather, shares from his experience, more than half of the calls he had received over the course of one week had come from people who were initially on-board with purchasing an off-the-plan apartment, but due to the turn in events, had changed their minds.

“We’re also hearing that recent uncertainty around off-the-plan apartment valuations dropping in the wake of the market decline, and the delays we’re seeing in current residential apartment projects, have also contributed to potential buyers seeking alternatives,” Eather says.

Having tended to questions from clients, which surrounded the reliability of building costs, and whether there are any guarantees tied to the quality and durability of builds, Eather says: “[buyers are] clearly looking for a higher level of dependability, lower risk and a reliable level of investment.”

Peter Koulizos, Property Investment Professionals of Australia (PIPA) chairman and lecturer in property at UniSA Business School, says that the recent Opal and Mascot Towers incidents have shone the spotlight on apartment blocks for “all the wrong reasons”, with insurance concerns taking centre stage.

“This negative publicity will affect apartment owners for a while, especially those who own apartments in Mascot and Opal Towers. People are less likely to buy this type of apartment – this results in less demand for apartments, which consequently puts downward pressure on apartment prices,” Koulizos says.

Insurance for landlords: When are you covered? And when are you exposed?
Fox-Slater says that it is the responsibility of the body-corporate to take out strata insurance, which will work to cover the building, its common property and any common area contents provided by the strata scheme. This is because the building structures are owned collectively and managed through the body-corporate, she explains.

“However, those who have investment properties in apartment blocks also typically need landlord insurance, as strata insurance does not offer cover for unit contents like non-fitted appliances and personally-owned items, or risks such as loss of rent, liability and tenant damage,” Fox-Slater says.

Furthermore, when problems caused by the building’s construction comes into question, she says: “Many policies actually do not cover the cost of damage that is a result of defective construction. This means there is virtually no safety net for those owners-investors who have properties in such buildings as Opal and Mascot Towers, who have ultimately lost a tenant and an income.

“This is only a recent development for this type of damage as more and more buildings fail to meet safety standards. As a result, insurers are no longer willing to take the risk and are stepping out of the market, as is their right.”

In an effort to assist their clients, which Fox-Slater says “have effectively been financially hung out to dry” by the Mascot Towers incident, EBM RentCover’s policy will cover investors for rental losses of up to 52 weeks, provided that the losses resulted from residents being restricted from accessing the premises.

Tips for investors: What can be done now?
Fox-Slater advises buyers and investors who are interested in purchasing a high-rise unit to thoroughly research developers and builders prior to making a purchase – most especially when it comes to purchasing an off-the-plan apartment.

To help minimise potential risks for the investor, Fox-Slater shares her tips:

  • Research the history of the developer and the builder, with the aim of finding out the previous projects that they have worked on. Conduct an on-site visit to these projects and discuss the quality of the build with the residents.
  • Employ a professional to conduct an independent building inspection. Fox-Slater says that this is fundamental when it comes to purchasing freestanding homes, and should be equally as important as when buying a high-rise apartment.
  • Obtain a copy of the strata report from the body corporate, paying careful attention to the value and forecast of the sinking-fund, as well as any upcoming and completed maintenance works. Fox-Slater says that your real estate agent should be able to provide this report, along with the contract of sale.
  • Find out what insurance is taken out by the body corporate to protect your investment property.

The NSW state government is working to prevent such incidents from occurring again, announcing a Special Commission of Inquiry into the standard and quality of builds, and any compliance short-fallings. For Fox-Slater, however, this isn’t enough; she believes more action needs to be taken, comprising of no less than “a regulatory overhaul of the country’s construction sector”.

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