Tips amid the turbulence for off-the-plan investors

As off-the-plan developers struggle to meet sales targets while the threat of COVID persists, Australia’s rental and apartment market continues to diverge between east and west. 

Rental yields drive much of the investment market in units.

Rents in Perth, as well as Darwin, have surged around 10 per cent, while at the opposite end of the spectrum, weak demand and high supply has driven a sharp drop in rents across the Melbourne and Sydney unit markets.  

CoreLogic’s research director, Tim Lawless, attributed the strength in Perth and Darwin rentals to both strong demand and a recent history of minimal supply additions. 

“Both cities have recorded below average levels of investor activity since housing market conditions started to cool in mid-2014, which has led to a shortage of rental stock,” he said.

“With stronger interstate migration driving housing demand, rental rates have been under substantial upwards pressure as demand for rentals outweighs supply.”

A survey late last year conducted by Investorist based on interviews with hundreds of property professionals, found only 35 per cent off-the-plan developers were expecting to meet their sales target for 2020.  

This was primarily due to the stalled development markets in the major cities of Melbourne and Sydney.

Demand for inner city unit rentals has been significantly impacted by stalled overseas migration, especially from lower overseas student numbers. Weak demand for inner city unit rentals has been exacerbated by a recent history of high rise apartment construction in Melbourne and Sydney, with the pipeline of new units that are still under construction remaining well above the decade average. 

Melbourne unit rents are down 7.6 per cent over the calendar year and Sydney unit rents are down 5.7 per cent. 

Weak rental conditions across the unit sector look likely to persist until overseas migration starts to ramp up and the higher levels of supply are absorbed. 

Rental yields have been under some mild downwards pressure through the COVID period, with the gross yield across the combined capitals region reducing from 3.51 per cent at the end of 2019 to 3.42 per cent in December 2020, while yields across the combined regional areas have reduced from 5.03 per cent last year to 4.83 per cent this year.

Hits and misses

Despite, or perhaps because of, the tough operating conditions for developers of off-the-plan properties, there were still east coast pockets that presented investor potential.

Lloyd Edge, Director of Aus Property Professionals and author of Positively Geared, said a focus on population growth and avoidance of volatility were the keys to finding value in the current market.

“Buying well located properties where there is demand and a strong population growth can still work but there need is undoubtedly a need to be careful when buying off the plan,” Mr Edge said.

“Having said that, Newcastle apartments have performed well and also suburbs in Sydney close to the water or the city are still in demand.”

Mr Edge was more forthright about the places to avoid.

“The worst prospects are inner Brisbane, especially Fortitude Valley, and inner Melbourne, particularly Docklands, where the councils approved too many developments a few years ago and these cities are still struggling,” he said.

Mr Edge said investors should also “stay away from the Gold Coast”, where there was too much price fluctuation driven by tourism ebbs and flows and “no real long term growth prospects”.

“Massive oversupply, especially in the high rise areas, has led to price falls and little if any growth, while vacancy rates also increased and rental prices decreased,” he said.

“Melbourne has also had some pretty poor construction - building on the cheap - resulting in issues with the developments."

Tips for off-the-plan investors

Mr Edge shared with API Magazine a few handy hints to off-the-plan investors:

• When buying apartments it’s crucial to look at the by-laws and a strata report, which will help you determine whether there is a healthy and friendly operation of the building.
• If you are buying off the plan, because the process generally takes a couple of years, you need to consider that the market may change considerably and interest rates and property prices are likely to fluctuate from when you purchase until you settle.
• Consider the type of ownership you want to own if you are purchasing with a spouse or friend, as this can go against your wishes under a will.
• Be sure to account for fluctuating interest rates, upfront costs, First Homeowner Savings Accounts and budgeting for your lifestyle when buying a property. Also consider your inspection costs, conveyancing costs, stamp duty costs, set-up costs and changes to interest rates in your budget to buy a property.
• Liaise with your accountant if buying a property for investment purposes, as there could be significant tax benefits.

In the event a project does not go ahead or is significantly postponed by the developer, buyers with an off-the-plan contract are usually protected. 

“The sunset date in an off-the-plan contract is a date in the future within which the developer must complete the construction of the property and have the strata subdivision completed,” Mr Edge said.

“If the property is not completed by the sunset clause, buyers usually have the right to terminate but you must always check what the sunset date is in any contract you are about to sign and seek advice from your solicitor.”