Buying a property off-the-plan (OTP) basically means purchasing a property before it has reached completion. For many, it is an attractive option when compared to buying an established dwelling as buyers often enjoy tax benefits, incentives and exemptions or concessions on stamp duty. However, there are also inherent risks in purchasing OTP. The finished product may differ to the plans or the development may not go ahead at all. Moreover, the time between the OTP sale and the completion and settlement of the dwelling means that OTP buyers are essentially paying today’s prices for a product in tomorrow’s market. This makes sense when the property grows in value. However, slowing price growth across all markets has seen sentiment shift and this has given rise to greater settlement risk.
Australia is on the cusp of an upswing in transport related engineering construction over the three years to FY19, led by an unprecedented amount of work on major projects (projects with over $2 billion in construction work done). But is it just another cycle or does it signify the start of a higher plane of infrastructure investment?
China’s rapid development over recent decades has resulted in a burgeoning middle-upper class ready to see the world and Australia is one of the top destinations. The volume of short term visitors from China has skyrocketed post GFC, roughly tripling over the 2009-2016 period to 1.18 million per annum. As a comparison, short term visitors from the rest of the world lifted only 30% over the same timeframe.
While office construction remains weak for the whole of Australia, this national figure does not paint the whole picture. By breaking down office construction by states, a more compelling story emerges.
The story is one of a two-speed office market. Reflective of their economic performance, Sydney and Melbourne are the standout performers with Perth and Brisbane feeling the pain as the mining boom wanes.
As the apartment market weakens, there is increasing concern that apartments will increasingly fail to settle, putting projects, and the market, at risk.
Can it happen? Has it happened before?
The short answers are yes and yes.
Settlement risk rises when values are falling. The purchaser is required to provide a further equity contribution if the property is valued lower than the purchase price and/or the loan-to-value ratio is lowered. If the purchaser does not have the money, then they will be unable to settle. Moreover, if settlements fail on a large enough scale, the developer also will not be to meet its own finance commitments, resulting in the financier placing the apartments back onto the market at “fire sale” prices to recover debt—further dampening values and increasing settlement risk further.