Unscrupulous Aussie Developers Selling Sh*t to Unsuspecting Overseas Chinese Buyers Leading to an Oversupply of CBD Apartments… You’ve Been Warned!
Seems that some dodgy operators are taking advantage the Chinese appetite for Australian property. What were supposed to be high-end units are on their way to becoming the slums of the future. Even if you’re not buying straight from Dodgy Dave, there are some major pot-holes you’ll need to be careful to avoid.
The Australian property market is attracting a lot of attention around the world right now – and a lot of money.
That creates some huge opportunities, but it also creates some dangers if you don’t know what you’re doing. There’s quite a few traps for new players.
And it seems like the new apartment market might be becoming one of those traps.
And when I say apartments, I don’t mean all apartments in all markets. I’m not talking all units and townhouses. Many of those, especially older ones in established areas can offer investors excellent value.
What I’m talking about in particular is off-the-plan high-rise developments in the inner cities of Melbourne and Sydney – especially those marketed directly to offshore buyers.
It seems that all this money flooding in from overseas has gone to people’s heads. But this is the way the market works. People get carried away in the good times, and get overly depressed when things get rough. That’s what creates such big booms and swings in the cycle.
But to turn a profit out of it you need to stay a step ahead, and keep your head while everyone else is losing theirs.
So what’s going on in these inner-city apartment markets?
Well, I’ve written a lot about the tsunami of money coming out of China. And there is a sense that many Chinese people are desperate to get their money out of the country. That desperation is making them careless… or maybe it’s naivety. I don’t know.
At any rate, it seems that quite a few offshore investors are buying site unseen, and just trusting the word of the developers and agents.
Most probably do ok. But any industry has its share of shonky operators. Property development is no exception.
And as I’ve said before, there’s just no substitute for due diligence and research. It seems that a lot of offshore buyers are about to learn that lesson the hard way.
Property Observer has been running the story of some dodgy developments that have gone up around Sydney. One development in Mascot in particular, even though it’s just a few years old, is riddled with problems.
When a new property manager took over the apartment for an overseas investor, he found waterproofing issues, render coming away, broken lights and potentially dangerous electrical work on his first visit.
In one bathroom, the ceiling had collapsed altogether.
This is in a high-end apartment that’s just four years old.
Compounding the problem was the fact that the tenant had complained about the gaping hole in his roof, but the property manager didn’t do anything about it. He didn’t even pass the information on to the owner.
And part of the reason for that seems to have been because the property management company runs out of the same office as the developer. If the defect is not picked up on quickly and passed on to the developer for rectification, then it becomes ‘wear and tear’ and the investor is liable to cover the expense.
Same story with strata issues. Outside the building, cracks and marks in the render have appeared – signs of movement and water leakage from the walls inside – and in some cases the render was coming right off the wall.
In the basement car park (always worth checking!) it was damp and there were large puddles everywhere.
If the investors are based overseas, they’ll have no idea that this is going on. If the issues were picked up on early enough, the developer could be made to foot the bill. If it takes several years before investors actually clue on to what’s happening, the Owners Corporation (i.e the investors) are liable.
And after several years the developer has probably wound up the special purpose vehicle used to build the apartment block, making it extremely difficult for investors to get their money back.
And in NSW, buildings over 4 stories aren’t eligible for Home Owner’s Warranty Insurance.
What a shambles!
You could imagine how hard it would be to manage all this if you actually lived in the building. What if you lived 3,000 miles away and didn’t speak English?
You’ve acted in good faith. You’ve probably trusted the developer because you’ve heard there’s a strong rule of law in Australia, so what could go wrong?
Sucks to be you.
Even if they can sort it out, they’re going to take a big hit to the hip-pocket. The new property manager says the unit was originally bought off the play, sight-unseen, 5 years ago for $550,000. After 5 years, and a massive boom in Sydney property prices, he reckons the owner’s now getting no offers for it at $650,000.
What’s worse, the property initially rented for around $700/wk. Now, they’re struggling to get $620.
Ouch.
I’m sure this is an isolated incident, and for every investor that’s been ripped off there’s probably a dozen success stories. But it highlights the potential trap you can fall into if you’re not doing enough research – particular on the track record of your developer, and the relationships between the developers, sales agents and strata managers.
But it would only take a handful of these dodgy developments in an area, and you could turn a potentially nice suburb (and a potentially profitable market) into a sophisticated slum. There goes the neighbourhood.
So even if you bought well – did your due diligence and researched everything properly – a couple of dodgy developments like this just down the road could knock the legs out from under your investment.
This has broader implications for particular market segments, but I’ve run out of time, so I’ll leave it to next time.
Stay tuned folks.
M says
Folks
Some advice for new starters……..take it or leave it. I wish I had someone give me this advice when I started out.
Never buy a property ‘off the plan’ from a developer anticipating to take over the caretaking/management rights of the development. I believe a severe conflict of interest in this arrangement and inevitably the owner will pay!
Buy properties that already have a solid body corporate track record with no ongoing relationship/hang-over from the developer (a good example being well established property).
Best advice I never got!
Still not convinced says
Agreed. My wife and I bought “off the plan” some years back in Darwin. While the place was (much!) better built than this, we didn’t quite read the tea-leaves as well as we should have. What followed was a massive over-supply of units/apartments in the CBD, and we struggled to offload it a few years later. In hindsight, should have hung on to it; just didn’t want/need the hassles of long-distance property management, given we’d moved to the Eastern Seaboard by then…
Still, over supply of inner-CBD apartments isn’t new (although the cra*ppy quality to go with it just compounds the issue). Banks have been reluctant to lend much more than 60%on LVR for these kinds of properties for a long time. Locals are waking up to the fact that there are too many (and are over-priced), so it’s natural that the developers will “target” unsuspecting foreign investors…”caveat emptor” would seem to apply.
Tina says
Absolutely true !! I have watched these apartments go up everywhere in the inner CBD Melbourne and made an effort to view quite a lot of the apartments available for sale in high rise that look amazing architecturally and design from the street and once you enter the building and leave the marble floor foyers, up the elevators to inspect apartments your totally disappointed! Tiny, very cheaply built with materials that you already see falling apart, the smell of sewerage through the hallways, reinforcement columns in the middle of lounge rooms that have had to be placed there due to structural problems and poor building practises during construction , looks like there is no real body monitoring any construction of these high rise apartments and the list goes on… Including developers asking for ridiculous prices to purchase. I did raise these issues with agents and developers and the excuses given indicated no knowledge or interest in ensuring building regulations have been met nor quality of build and concern for buyers just PROFIT PROFIT PROFIT — (NOT THEIR PROBLEM!!)
However, many are vacant and now agents desperately leasing them out to party weekenders that cause more damage just to bring in an income yet more are continuously going up!
Luke says
There is a number of developments in Auburn, Sydney…. Exactly like the one in Mascot, maybe worse. Render falls off like leaves do off trees in Autumn. And people keeping buying into them… Because they are a little cheaper than market value… I wonder why??!!!
Glen says
I’m seeing it all in Brisbane, currently there are more and more hi rises going up everywhere and I get to inspect them before handover and see just how badly built and designed they are. Brand new and falling apart before lived in blind Freddy can see these buildings will be a constant problem for owners that have not done their homework on reputable builders. This does come with some good the area as a whole is moving ahead creating plenty of work.
Paul says
For a short time I worked for a managing agent that was owned by the developer. Not giving you any names but it wasn’t in Mascot. The developer was mainly selling off plan to interstate buyers who did not know the local areas and claimed they were near all sorts of amenities, they probably were within a few minutes if you were an athlete, the rest of us humans needed a car.
It was easy for me to get out, I just went and got another job but the owners were stuck. The in house sales team were not in a hurry to resell units that were generating a management fee, they will move the new ones first and get a higher commission for doing so.
Kathy says
This is also happening in Brisbane, particularly South Brisbane, West End, Fortitude Valley, Bowen Hills and suburbs just a bit further out but on the train line, such as Chermside and Nundah which are fast turning into ghetto slums.
The council is completely uninterested in lifestyle and liveability, they just want to cram as many units in as small a space as they reasonably get away with, regardless of the neighbours and any objections lodged. They’re quite happy to approve five or six level multiple unit developments built to the boundary and too bad for the people next door who will now be in shadows for more than half the day.
Brisbane City Council is desperate for money because it over committed on building tunnels that ran over budget and are hugely under patronised and bleeding them dry. They see the property markets as a means to plug some of the gap. Double benefit for them, they get all the fees charged to developers and then the rates from the multitude of properties in these new developments which may potentially have dozens of new dwellings where there were previously only two or three houses.
They even approve development on flood plains as has happened recently despite more than a dozen objections being received due to the flood risk, not just to the development but to the neighbouring homes as well.
Obviously the developer knew someone high up in council and made a number of donations to the party in power. And yes, I do know this happens, as I have worked for a couple of developers and seen it first hand.
Ken. says
Anyone who buys anything rendered, are bound to have trouble with plaster falling off walls. This is a sure sign of trouble or on a shoddy cover up underneath. I don’t like units or apartments full stop for a heap of good reasons. Hire a private building surveyor before you sign anything. Cheers, Ken.
Jason Wilcox says
WOW guys I’m learning so much here from your comments,from your own trile and error,I owes youes all a beer,thanks for sharing
carol says
A great piece of advice, especially for those young first homebuyers. As freestanding ‘traditional’ homes are becoming out of reach for first home buyers, it’s only natural to look at a more affordable options ie. apartments/units.
Ray says
I have worked on a Richmond (Melbourne ) apartment block, where the plasterers only screw up the plaster, and don’t glue it.
The screws are there to hold the plaster, while the glue goes hard.
This is why the plaster falls off the ceiling.
To bring the cost of the building down, developers use aluminium mains cable to main switchboards. The life of aluminium cables is 25yrs, copper is life time.
Carol says
mmmmm, interesting. It’s so wrong! The poor buyer who is unaware(like 99% of buyers) gets stuck with costly repairs. How can you ever know what is behind gyprock/render/brickwork…there is no way to tell if corners have been cut during the structural phase. We (the end buyer) only ever get to see the ‘pretty’ facade.
Sal says
Wow! What a rip off! There are so many off the plan apartments going up right now. And in all the worst places, like next to railway lines and on busy roads, etc.
I have seen some apartments at Glebe, and I was shocked at how ugly they turned out, especially for such ridiculously high prices. What a load of garbage!
Bernard says
Looking beyond these construction issues and moving to a financial perspective, buying an apartment as an investment property is just so inferior compared to buying a turnkey house and land package in the suburbs. The financial costs to an investor of an apartment (none of which apply to a house in the suburbs) are 1. the build time 2 the costs of frequent tenant change overs 3. the body corporate fees 4. the sinking fund fees 5. the exit strategy. And of course infinite supply means that there will be little capital appreciation – if any – during the time you hold. Common sense is not very common, is it?
Chris says
Probably a bit late for this but if you guys have any more stories, would you mind also sharing it on this website : http://www.crediblepropertydevelopers.com > its a fairly new website collating all sorts of developer / off the plan stories. Thought it might be helpful for future buyers to identify which developers are credible or not. cheers