For all that we take from our planet, it has a way of taking back – in a big way. We were reminded of just how terrifying this can be when, as 2019 came to a close, bushfires burned out of control across the country, ravaging forests, wildlife, families and homes along the way.
Indeed, many property investors will have felt the brunt of the bushfires’ blow. Some will have seen their investments destroyed or damaged, and others will still be watching the value of their dwellings fall as once-thriving communities are now faced with the need to rebuild.
“One of the big impacts of the bushfire crisis will be on the rebuild costs and therefore the adequacy of the sum insured listed on an investor’s policy,” explains Brendan Goddard, managing director at Macey Insurance Brokers.
“Building codes for bushfire-prone areas are already quite robust. However, it’s more likely that these codes may be spread out to what have traditionally been lower fire-risk areas, the more average suburbia.”
As a result, building in suburbs “that were traditionally not classed as high bushfire risks will now cost more to meet the construction standards”, Goddard says.
Areas that are now considered bushfire-affected zones will also see insurance premiums hit new heights.
“This means the cost to invest in these areas will increase, along with the cost to insure, and therefore rental costs will need to increase to ensure the investor still gets the yield they are after,” Goddard explains.
“We have been seeing rate increases in the property insurance sector for around two years now. The main driver of this is weather event losses incurred by insurers both locally and abroad.
”It didn’t start or stop with bushfires. After weathering a storm of flames, January 2020 brought with it another wave of disasters as storms of massive hail struck Canberra, Melbourne and other parts of Australia’s southeast. Southeast Queensland battled heavy rains and flash flooding, while dust storms obscured parts of NSW.
“Before you buy, making enquiries to the local council should be on your research checklist – they will be able to provide information on certain risks for each property”
“In recent months, we have experienced the full force of what Mother Nature can do, from catastrophic bushfires to hail and flooding. These natural weather events are becoming more frequent and more powerful due to global warming,” Goddard says.
In light of these events, it’s imperative that property investors take smart, practical steps to ensure their investments are safeguarded in the long run.
Different risks to consider
Some common damage that the elements can inflict on a property include broken windows, stripped roofs, overflowing gutters and pipes, power surges and flame damage.
Outdoor areas like gardens and courtyards are also prone to destruction, and the repairs and replacements required can be astronomically expensive.
In early January, the Insurance Council of Australia reported that claims resulting from the bushfire situation were estimated to amount to more than $700m. Nearly 2,000 homes were destroyed, and almost 9,000 insurance claims were made.
Depending on where you own property, the weather-related risks may differ, with general disasters ranging from bushfires to flooding and droughts. For those investing in northern Australia, cyclones can also be a major problem.
“These are common weather events you need to consider when purchasing an investment property. They can cause damage not only to the property but also to the community, leading to unemployment and population decline,” says Wayne Jessup, founder of The Property Bloke.
“For instance, the properties located in the regions affected by the recent bushfires could see a short-term decline in value until the community rebuilds.
”This would certainly be a blow to both long- and short-term investors, as all landlords are in this game with the goal of making a profit. For those who are already in the market and own property in affected areas, your options are to sell (potentially losing money) and cut your losses, or ride out the weather-related downturn until conditions improve.
If you’re not sure what action to take, getting advice from an experienced, accredited advisor may help you work out how the property fits with your long-term goals.
A proper shield
Adverse weather situations highlight why it’s crucial to get accurate advice on how to properly insure your investment properties.
“Most property owners’ insurance policies will cover pretty much all natural weather-related events, but it is important that you check the policy details to ensure there are no hidden exclusions,” Goddard says.
“Flood cover is sometimes excluded and may need to be added at an additional cost.”
“Most property owners’ insurance policies will cover pretty much all natural weather-related events, but it’s important that you check the policy details”
Goddard advises having an insurance professional on your side to help you review the terms and conditions of any policy you’re looking at. He also cautions investors against trying to cut corners on insurance.
“The biggest mistake we see involves property owners who seek to save money on their insurance premium by not insuring the true replacement value of their property. Underinsurance is a major issue,” Goddard says.
“You get what you pay for, so the cheaper the premium, the more restrictive the cover may be. Keep in mind that values must include the ‘removal of debris’ costs, professional fees, infl ation costs and consideration of building materials used.”
Another valuable but often-overlooked coverage is for loss of rental income, which keeps an investor from losing out on rent earnings if the property is rendered uninhabitable, and enables them to continue paying expenses like their mortgage.
While damage to properties can be unavoidable in the event of weather disasters, and there is no such thing as a risk-free investment, there are ways in which you can try to minimise any negative outcomes.
“Before you buy, making enquiries to the local council should be on your research checklist – they will be able to provide information on certain risks for each property,” Jessup advises.
“You don’t want to purchase a property and then fi nd out after you have signed your contracts that you can’t be insured for fi re and flood – and worst case, that you won’t be able to insure the property at all.”
Planning is key, Goddard adds. “Be prepared early, and don’t leave things until the last minute. Keep the building well maintained and have a proper fi re plan in place if required.”