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Is off-the-plan off the table?

Apartments construction at sunset in Melbourne
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Buying apartments off-the-plan can have significant risk in a rapidly falling market. Photo: Shutterstock

Is off-the-plan off the table?

Off-the-plan apartment sales have taken a hit from the COVID crisis, but a newly released survey of more than 200 developers reveals while the damage is real, it is more limited than many had feared.

Off-the-plan apartment sales have taken a hit from the COVID crisis, but a newly released survey of more than 200 developers reveals while the damage is real, it is more limited than many had feared.

While 60 per cent of developers reported their sales declined by up to 25 per cent, fewer than 20 per cent of developers had their sales rates halved or worse.

The report was compiled by Investorist, a business-to-business off-the-plan sales platform that promotes and distributes more than $25 billion in properties to 9,000 agents globally.

Investorist chief executive Jon Ellis said it was hard to see how the Australian property market would come through the coronavirus challenge unscathed, but said there were glimmers of hope based on the survey results.

“There is little room for property news in the media, as it is filled with the escalation of COVID case numbers, however, the little news there is paints a dismal picture and all national mastheads are placing bets on when the market will crash and how far,” Mr Ellis said. 

“However, with all the doom, sections of the Australian property market are experiencing a boom; titled land in all Australian states is about to be sold out and volume home builders have a full workbook, all because of a $25,000 government grant, so clearly, these buyers don't foresee a property market crash.”

The headwinds for off-the-plan developers are undeniably strong. 

Around half the off-the-plan properties currently being completed are being valued at less than the original contract price, with many showing current values being more than 10 per cent below the original contract price, according to CoreLogic data.

Storm clouds or clearing skies?

Buying off the plan, when you agree on a price and sign a contract to buy an apartment that is yet to be built, has its advantages, but unemployment poses a huge risk to buyers who lose their job and cannot meet settlement dates.

When markets are buoyant, off-the-plan generally only requires a small deposit, and if prices are rising, as they had been in Sydney and Melbourne over the past couple of years, buyers hope to pay a lot less for a property than what it would be worth at the time of moving in. In a falling market like today’s, the reverse is clearly a risk.

Savings on stamp duty that will only apply to the land value, not the finished product, can be quickly erased by a falling market. For investors, the collapse in immigration has also driven rent returns down.

But more than two thirds of developers surveyed cited local owner occupiers as one of their main markets, while three quarters conceded that COVID-19 was affecting buying decisions.

The report outlined the top three challenges to the market as being economic uncertainty, availability of finance and changes in government legislation. 

Surprisingly, not a single surveyed developer was concerned about the saturation of the market, which is one of the top three reasons cited in the media as putting off-the-plan property market on the cusp of a crash.

Tom Howgate, managing director of real estate development and acquisition organisation Kincrest in Melbourne, said it was a tough market but supply was not the issue.

“I don’t think now is the right time to buy because of all the uncertainty but it is a good time to do your research, know what you want and be ready to identify an opportunity when it arises,” Mr Howgate said.

“In the past ten years, up until recently, there had been decent levels of stock coming onto the apartment market but even before COVID there had been a sharp fall in supply and over the next year or two as the pandemic stalls developments there is going to be a shortage at some stage,” he said.

“Immigrants, students, interstate business – it will all come back eventually and that upswing could well coincide with the supply shortfall.”

Adelaide, unlike Melbourne, has been spared the worst of the virus-induced shutdowns but even there supply is seen as being limited by the economic uncertainty.

Dwight Stuchbery, project manager at Griffin Group, said sales enquiries were being spurred by the availability of government incentives and grants.

“I feel we are on the low side in general (in terms of supply) and I don’t see this changing too soon, with a number of developments across the city recently shelved or delayed,” he said.

“There was certainly a noticeable reduction in activity earlier this year when the COVID pandemic was first felt here and restrictions were coming into place but in the past six weeks, as confidence has increased and the homebuilder grant has come into play, the enquiry level and transactions have increased substantially.”

Agents, prices taking a hit

Real estate agencies appear to have been harder hit than developers during this pandemic, the Investorist report found, with restrictions during lockdown pushing many businesses to the verge of closing.

Only 15 per cent of real estate agencies didn't see an obvious reduction of sales, while the other 85 per cent suffered from a loss of business to varying extents. 

Almost half of surveyed agencies experienced a drastic drop of business greater than 25 per cent, which means they are likely only surviving on government grants. Most agencies predict the downturn will continue for the rest of the year, bringing staff cuts as government support is wound back.

Buyers still in the market can scent trouble and are pushing for price reductions.

“While a large number of developers are holding firm on prices, the industry as a whole is aware that price falls in the short term are inevitable,” said report initiator Mr Ellis. 

“Two thirds of agents are forecasting them, as are just over half of developers, however, very few are predicting falls greater than 10 per cent and the majority of both camps see prices only moderating, not diving.”

Interestingly, developers are divided on price changes over the next 12 to 24 months, with views it could go 5-10 per cent either way.

“Many are of the opinion that the economic impacts of COVID-19 simply must flow through to property prices, while others believe a combination of industry stimulus and the forecast infrastructure spend will boost demand for materials and trades, leading to increased construction costs and prices having to rise again,” the report stated.

With sales volumes cut, some to critically low levels, there are fewer buyers in the market and the ones that are there have less to spend and are expecting discounts. Many agencies and property developers have laid off staff and more redundancies are likely later this year.

But despite the gloom around the current state of play, Mr Ellis concluded optimistically that “the next 12 months is likely to be bumpy, however, most in the industry are forecasting a V-shaped recovery with sales volumes and prices recovering in the coming 12-24 months.”

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