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.
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.