A looming apartment glut could mean new opportunities for savvy investors aware of their increased bargaining power and how to use it. Rental guarantees, free appliances and upgraded fixtures, assistance paying stamp duty and help with deposits are some of the incentives being used by developers to complete deals.
Every state and territory except NSW has a large and growing over-supply of apartments, with an additional 200,000 to be completed this year and 217,000 in 2018, according to industry statistics.
Some claim that a flight from the suburbs to the inner city, rising population growth and a shortage of dwelling stock will easily absorb the completions. Others say falling prices, or sluggish growth, reveal market saturation.
Buyers acting on the advice of mortgage brokers, financial advisers, or agents can push harder for a cheaper price, or ask them to rebate some of the jaw-dropping bonuses paid by developers for their recommendations.
Tens of thousands of dollars in commission payments, volume-linked bonuses, cash and other lucrative incentives are increasingly on offer to advisers who recommend apartments to owner-occupiers or investors.
Current offers to agents involve commission payments of between 3 per cent and 10 per cent of the sale price and $10,000 cash bonuses, which are doubled for successive sales.
What’s being paid A typical arrangement will involve an agent being offered $10,000 bonus for the sale of a one- and two- bedroom apartment and $20,000 or a three-bedroom apartment. The agent receives half when the client agrees to buy off the plan and the remainder upon completion.
There is also a commission equivalent to 5 per cent of the sale price, which means an agent selling a $900,000, three- bedroom apartment could earn about $45,000 on top of the $20,000 bonus.
Payments vary between developers and rules differ between states and territories.
For example, a new low-rise complex in Hendra, about six kilometres north-east of Brisbane, is selling three- and four- bedroom terraces for between $700,000 and $750,000. Confidential documents reveal agents are being offered 5 per cent commission and a $10,000 sales bonus. Buyers are eligible for a free appliance upgrade, blinds and 5 per cent rental guarantee for 12 months.
In Melbourne, a four-storey complex in Thornbury, about seven kilometres north of the central business district, is offering one- to two-bedroom apartments from $400,000 to $600,000. Agents are being offered 7 per cent commission and bonuses.
Incentives for buyers prepared to push hard include a two-year rental guarantee at 5 per cent, or a white goods package including a fridge, microwave, washer/dryer and television.
The Reserve Bank of Australia and market regulators, such as Australian Prudential Regulation Authority, are turning the screws on property investors by encouraging lenders to make it tougher to borrow.
Results have been mixed, with investment lending continuing to outpace owner-occupier, business and first-time home buyers.
Lenders are raising investment loan rates, increasing minimum deposits, tightening lending criteria, restricting discounting, scrutinising borrower income more closely and requiring interest-only borrowers to disclose their strategies for repaying loan principals.
Developers are attempting to offset the tougher conditions by capping stamp duty and helping with deposits.
Ben Kingsley, chair of the Property Investment Professionals of Australia, says there is “no doubt” the volume and value ofincentives are increasing in Melbourne and Brisbane as the supply pipeline swells and demand slackens. Developers are less likely to squeeze their margins in Sydney where demand remains strong.
John Birt, principal of Radar Results, a buyers’ agency representing financial planners, claims some financial advisers have been generating annual commission payments of up to $300,000 for recommending off-the-plan projects to clients.
Birt, who analyses earnings of financial advisory companies to set a price for their sale, says property advising has proven so lucrative that many have left financial advice for property consulting.
“Many financial planning practices have been advising their clients to buy property, particularly within their self-managed superannuation fund (SMSF). But what effect would property prices moving down 20 per cent have on the client’s overall financial situation?” he says.
Birt warns most advisers do not have professional indemnity cover for actions involving property recommendations.
Mortgage brokers need to disclose commissions â€“ both upfront and ongoing â€“ for mortgage recommendations but not for related property transactions.
Authorised financial advisers have to disclose commission in their “statement of advice” to their clients that sets out the suitability of their advice for the client.
Some advisers are “referral partners’ with developers and receive a commission on the sale price and another upon settlement.
“You can’t walk into one room as a financial adviser representingthe best interests of a client and into the next as an agent representing a developer,” says Robert Cumming, a director of HNW Planning.
Cumming says his fees for any recommendations are fully disclosed and payments above $15,000 are rebated to the client.
There are also spruikers, sales representatives, agents, promoters and marketers who can sell the developments without professional qualification or legal requirement to disclose payment.
What to check
A shrewd buyer will clarify with the agent or adviser exactly how much will be paid before signing any authority, according to spokesmen for government consumer agencies. That involves requesting a copy of the authority after signing it. Those still in doubt should seek clarification from an adviser, or lawyer, with experience negotiating contracts.
If you’re trying to clarify their commission, watch out for commission scales.
For example, commission might be 3 per cent up to $500,000 and 4 per cent above. The buyer might interpret this as only the amount above $500,000 having a 4 per cent commission. But the agent might interpret this as the entire sale paying the top commission rate.
Brisbane apartment prices fell by 0.2 per cent and Melbourne’s rose by only 1.7 per cent during the past 12 months with falls of between 3 and 5 per cent posted in Perth, Canberra and Darwin, according to CoreLogic and SQM Research, which research market trends.
Fears of steep price falls due to foreign buyers being unable to obtain finance continue, although this has not made a significant impact inmost of the major capitals.
But one Beijing-based real estate agent, contacted by The Australian Financial Review, estimates about 10,000 Chinese buyers he is dealing with may truggle to complete apartment purchases.
Veteran mortgage brokers recommend potential buyers question whether their apartment is on offer because there are fewer international buyers or whether it was not settled because a foreign buyer could not find local finance.
Developers holding a deposit from a former buyer who could not settle might already be sitting on a cash windfall, meaning the buyer can push even harder for a better deal.
“Unfortunately, there is no way a developer is going to reveal that sort of former sales history,” a broker, who did not wish to be named, says.
Many apartment buildings around the central business districts of Melbourne, Sydney and Brisbane are poorly finished, small “dog boxes” that were constructed for overseas’ investors to park cash, rather than live in, say recent reports critical of planning standards.
Duncan Hughes, Financial Review, 6 Januayr 2017