It’s a good headline. “Apartments sell at a loss”. Let’s understand what is going on here.
CoreLogic research found that last year 1 in 5 Melbourne apartments, sold below their previous sale price. It was higher in the CBD which is where most apartments have been built.
To understand what is going on here, it’s important to note that many of these sales are not a typical existing apartment being auctioned one Saturday in 2014, and then again, 10 years later. Many of the apartments that sell at a loss are “off the plan” apartments, that are resold some years later as an existing apartment. Why does that matter? I can explain.
35 years ago there were virtually no apartments in Melbourne’s CBD. Now there over 100,000 plus many thousands in the surrounding suburbs.
This boom in apartment development in and around Melbourne over the last 30 years, transformed how apartment projects were designed, financed and sold. Before a bank will lend money on an apartment development, they need a guarantee that the apartments will sell. Or better still… contracts showing the apartments are already sold.
How can an apartment be sold before it is built? By selling it “off the plan” (OTP)
The developer needed to achieve a certain price for each apartment to justify the building cost. The bank required a certain percentage of unconditional sales before lending the money. No sales … no building.
This boom in OTP sales became very sophisticated. Millions of dollars was spent on marketing and incentives locally and throughout Asia. OTP sales enjoyed support from government by way of tax concessions and foreign buyer exemptions. Town planning and design guidelines all encouraged apartment development.
New property enjoys depreciation allowances (tax deductions) for the first 5 -10 years that older property doesn’t. Because they were sold OTP it was like “buy now pay later”. Purchasers put down a 10% deposit and paid the balance in 2-4 years.
Rebates were often paid to buyers or their advisers. Incentives like white good packages were often included. The apartment sale process was very well managed, and finance was relatively easy. Many developers also provided a rent guarantee to underpin the price and assist a buyers financial approval.
The new apartment project offered a vision of a higher quality of living and first-class facilities, location, finishes and build quality. For the investor it was exposure to property for a relative small outlay.
It was near impossible for a buyer to compare the market value of a brand-new apartment in the CBD, that you couldn’t yet see, touch and feel with an existing apartment. There was little negotiation on price because the developer needed to hit a gross sales number. They prefered to offer sweeteners.
It was also hard to meaningfully evaluate the apartments size, outlook, risk of a view being built out, quality of building management, potential of overlooking, and all the costs. Some investment buyers paid little attention to the property details as they were not going to live in it anyway. It was more about the financial return.
Tens of thousands of apartments sold this way in Melbourne over the last 30 years and still do.
Fast forward to today and many of the OTP new building perks are no longer available.
Here is why the sale of an existing apartment sale today may be less than the OTP sale
price.
|
Off-the-Plan Sale |
Existing Apartment Sale |
| No Stamp duty | Pay Stamp duty |
| Foreign Buyers Encouraged to Buy | Foreign Buyers prohibited |
| Large Depreciation allowances | Minimal Depreciation Allowances |
| Huge marketing and promotion | Limited marketing budget |
| Rebates and incentives paid | No rebates or incentives |
| Whitegoods packages or sweeteners | No additional sweeteners |
| Rent guarantees for 1-3 years | No rent guarantees |
| Low interest rates | Much higher interest rates |
| Hard to know its size, outlook, quality | Walk though and see everything |
| No knowledge of adjoining future buildings | Light and view reduced by other buildings |
| Rental laws and compliance not changed | New rental laws and compliance costs |
| Land tax threshold at $300,000 site value | Land tax threshold now $50,000 site value |
As you can see there is good reason some apartments sell at a loss. It is more about their journey from an “off the plan” sale to an existing sale. It’s not about apartments as an investment per se.
Buying an apartment off the plan has many risks and buyers should get good quality and totally independent advice.
The great news is that if you own an apartment today, the market has the wind behind it. There is growing demand and minimal supply which is very likely to generate above trend
growth over the next 5 years.
