Warning for off-plan apartments in Melbourne and Sydney

A lot of people start their career as property investor by buying off-the-plan. Unfortunately, a lot of the off-plan buyers have learnt the hard way that investing in property does not automatically make you rich.

Off the plan, or simply off-plan, apartments are often heavily promoted. Promises of high yields and discounted prices often turn out to be pure fantasy. Typically, off-plan apartments are priced well above current market prices and incentives such as rental guarantees are added to the price. As a buyer, you, not the developer, end up paying for the incentives and commissions to sellers.

Unfortunately, both in Sydney and Melbourne many of the off-plan projects are huge. Hundreds of units are coming on to the markets at the same time, all competing for tenants and buyers, driving both values and rents down. The number of new apartments in inner Melbourne has been increasing for the last two years and is set to continue to increase for the next couple of years. Also in Sydney, the number of new developments have increased drastically lately. This means that Sydney could start to suffer from oversupply of new apartments as well in two years time.

Nowadays, a lot of off-plan units in Australia are sold to overseas buyers. One reason for this is that overseas buyers are only allowed to buy off-plan properties. Another reason is that off-plan units are often priced way above current market prices, so investors who know the local market will not be interested. Chinese investors have become big buyers of off-plan units in Australia. One reason for this is that they want to have some of their money outside China. This means that their primary priority may not be making a good investment, rather they are looking for a safe place for some of their money. Quite clearly, without overseas buyers, many off-plan projects in Australia would never be completed.

By itself, buying off-plan is not bad. But it is best for experienced investors, rather than beginners. Ironically, experienced investors are seldom interested in off-plan projects while beginners often buy off-plan. Buying off-plan carries a number of risks. First, how can you know that the developer can deliver at all? New buildings don’t automatically mean high quality, developers may be tempted to cut corners in order to save money and increase their profit. Be aware that a lot of the new inner city apartments are very small, making them difficult to rent. It is also worth pointing out that most off-plan contracts heavily favours the developer. One thing to watch out for is how much time you have to organize your finance. If you can’t close the deal within the given time frame, you could in worst case forfeit your deposit.

But at the moment, the biggest potential problem is the huge number of big developments in inner Sydney and Melbourne. It is quite possible that both prices and rents will drop in the future. It may very well be possible to buy almost new apartments cheap from off-plan investors who have realized that they paid too much and just want out of the property business in the next few years. Not only that but you can also make sure you are buying a unit in a quality building.

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