A few years ago I was on a plane recently and I overheard a conversation, someone was talking about how they made a lot of money out of real estate, and the way they had done it is that they specialized in buying properties off the plan.
This is before they were even constructed or even started construction, and because the developers had to pre-sell a number of the apartment blocks, they were quite prepared to discount the first few just to get some numbers up so the banks would feel good about it.
So he was getting an automatic discount at the front, and he would then on sell them several years later given the fact that the market will move forward.
Now as I said, this was quite a few years ago, so I wonder if this strategy works today.
It’s a conversation I had on a recent RealEstateTalk show with Shannon Davis, director of Metropole Property Strategists in Brisbane.
Here’s the transcript of the interview:
Kevin Turner: Not a bad strategy maybe fifteen, twenty years ago, or even ten years ago, but does it work today?
Shannon: Well if you get to put a small deposit down and the market does it thing in the meantime and you settle two years later in a royalty market, then sure that’s a great strategy.
What we’re seeing more currently though, more recently is that maybe the concentration, the size of the development has been a little bit bigger, and sometimes the developer can actually be your competition.
If people put down a small deposit, their circumstance change, and the developer’s selling off stock at the same time as maybe they want to sell off shortly after completion, therefore, that discounting actually is a bad thing for the investor.
Kevin Turner: Yeah, pulls it back down. I guess you’ve got to be, that strategy I talked about at the start is okay if you, as you said, get in on a low deposit and you can actually achieve a discounted price, and then assuming that the developers sell all the stock on completion, you may be able to turn it over. As you said, you could be in competition with the developer.
Shannon: Yeah, that’s right. Any other investors that have had a change of circumstance, and especially if it hasn’t gone the right way, no one wants to settle on a property that’s less than what they were wanting to buy it for. I think this is used right now for people in Brisbane, Perth, and Melbourne because we’re starting to see in the CBD areas a bit of an oversupply in most capital cities.
Kevin Turner: Okay, so if someone were wanting to buy off the plan, what should they be doing? What sort of due diligence, Shannon?
[sam id=37 codes=’true’]Shannon: I think floor plans are really essential. Some of them are just too pokey and say 170 square meters for a two bedroom unit or 150 square meters for one bedroom unit, but you need to remember you’re paying the full cost of construction, your land ratio in that investment isn’t that much and you’re predominantly with a lot of investors rather than owner-occupiers, so in my recommendation, probably look from something nearby, something that’s comparable but is existing, and you’ll probably find a lot better value.
Kevin Turner: What sort of pressure is this going to put on developers? Because I said at the outset, in many cases they have got to get a certain number of sales up before the bank will even fund the project. Therefore, there’s got to be bank of people who will invest in these property Shannon.
Shannon: Yeah, definitely, and they’re mainly looking for the tax deduction of buying new. Maybe this is the first home owners/builders grant with it as well, but I think buying for tax deductions or rebates or incentives like that is a poor reason for investment.
I think developers might want you to compare to the existing market, they’ll say they’re different because it’s in this precinct and we’ve got this rooftop pool and everything like this, but if you compare a two bedroom unit that’s new and off the plan to what’s in the same suburbs that’s existing, sometimes it’s a big disparity in price and that’s something buyers need to be aware of.
Kevin Turner: So what you’re saying, bottom line here is that you don’t like off the plan purchases, you’d much rather look for something more established close by, Shannon?
Shannon: Yeah, just better land ratio and investment. Over time you don’t pay for the cost of construction, there’s more demand rises. Often, they’re more generous in scope and size and visitor parking, and you can add value. There’s very little value you can add to a brand new off the planning department.
Kevin Turner: I read some statistics just the other day just in closing too that quite staggered me about the number of people who are now investing in properties both for investment and also to live in, and I think the figures for something like twenty-five percent of all properties in Melbourne and now units, over thirty percent of all properties in Sydney are now units, but in Brisbane we seem to be lagging behind in that market because only about eight percent of all the properties in Brisbane are units. Does that means that we’re going to be seeing more units come into that market if we’re going to follow those trends, Shannon?
Shannon: Yeah, it gets them. The new campaign keeps Brisbane mainly as a low density capital city, but there are lots of areas of higher density around transport nodes and shopping precincts, and where those areas are, there’s going to be a lot more balconies rather than backyards and it’s just going to be something that Queenslanders and Brisbanites have to get used to.
Kevin Turner: Have to get used to, yeah. Always good talking to you, Shannon. Thank you very much for that insight. Shannon Davis from Metropole Property Strategists in Brisbane. Thanks for your time, Shannon.
Shannon: No worries Kevin, thank you.
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