House and land versus off-the-plan
If you're considering purchasing new properties as part of your investment portfolio, chances are you're going to have to choose between house and land packages and off-the-plan apartments – so you need to know the pros and cons of each.
Blogger: Andrew Crossley, Australian Property Advisory Group
1. House and land packages
Many vertically integrated sales firms promote this strategy, on the basis that land appreciates and buildings depreciate. They use some basic facts and twist them, or rather focus on them while ignoring all others, typically for their own gain and to support their own vested interests: because they make more money.
Sometimes they are the property developer. Sometimes they have ‘under the table’ deals going on, or they have simply decided that their business model will work one way or another. Possibly it is easier for them to train simple people in how to become good sales people, focusing on one product, because it may be too complicated for the (often) unscrupulous salesperson to intellectually cope with selling more than one type of product.
If you buy in an estate with 5,000 new houses, where is the scarcity? Where is the demand dramatically outweighing supply?
When the firm is flogging this as the only strategy, they will almost always be trying to sell you a piece of stock they have on their books.
A well-placed unit or apartment can be better than a poorly placed house. A well-placed house can be considered better than a well-placed unit, depending on a person's individual circumstances.
Be aware that a property marketing company’s property division will, typically, be under a different name than their sales division, development division, and mortgage division, etc. They would own one legal entity (which they own the land through) and then sell through another legal entity, therefore creating the illusion of two independent bodies. Of course the connection with all these entities is in small print somewhere, but how many people read this?
The ‘where’ and ‘when’ is important though, as is the type of house so it will suit the demographic and reduce risk of higher vacancy.
2. Off-the-plan
Marketing companies specialise in this type of investment. They use techniques, such as myopically focusing on population growth and proximity to the CBD, as impulse factors to influence a buyer’s decision. They work on motivating someone to channel their own focus on the logic of what is being said, rather than the logic being qualified (or expanded upon) and put into reasonable context and accuracy.
Other forces present in the market are intentionally ignored. An example of this is Melbourne’s Docklands — a nice place to live but one of the worst investment locations, based on supply and demand. The sheer supply mitigates the population figure moving there; in fact, there may as well be negative population growth, given the oversupply of apartments. This phenomenon of some property developers diminishing the investment value in particular areas, by oversupply, is common.
Marketing companies seem to redefine the term ‘artistic license’. They typically have KPIs (targets to achieve in sales) and they generally make five to six per cent, plus bonuses sometimes. They love selling to unsuspecting investors and the Asian market. The Asian market is susceptible to the tactics being used because they are accustomed to small housing.
Small living spaces are common across Asia, but these types of housing developments are often ugly, monolithic, high-rise eyesores.
You must consider where the unit is, how many units there are in the building and in the project, how many there are in the immediate surrounds, the size of living, the cost of body corporate; the list goes on. Bear in mind that the more units there are, the more rival investors you are competing against for tenants, rent charged, and (when eventually you choose to sell your unit) how many other units there may be on the market at any given time.
Yes, some will be owner-occupied, but these statistics and figures will not be known by any one marketing company. There are often several marketing companies flogging these apartments/units, and obviously they do not know how many investors each marketing firm are selling to versus owner-occupiers. The larger the percentage of investors the more it affects rental competition. But it does not matter how many are investors versus owner-occupiers – when it comes to selling, you are competing against everyone.
There are ways to reduce the risk with off-the-plan apartments. These include only buying when there are just a few units or apartments on offer. There is no hard figure. Some people stick to developments with no more than 12. Whatever you consider, remember that the more there are, the more you are competing with others.
So, to put it into context, the fact that units have only 10 per cent land value is a deterrent, there are a range of other issues that also negatively affect high-rise units.
Town houses are often off-the-plan as well. Town houses are worth considering in a balanced portfolio. There are normally not many in the development, and they have more land (say roughly 20 – 30 per cent value, as a component of the overall purchase price). They suit young families, who may not be able to afford a house, and they suit soon-to-be retired, or retired, generations who want to downsize. Buying a town house can assist an investor to afford a property closer in to the 10 – 20 kilometre radius of the city, at a lesser price than a house, and with more land content than units. Town houses are bigger in size, and they’re more appealing to people in many areas than units and houses.
The ‘where’ and ‘when’ is important obviously, mostly the ‘where’. Always research, seek advice from an unbiased professional and build a team around you. This team would always exclude a real estate agent, as these people typically represent the vendor. It always excludes a property marketing company. They always have stock lined up to sell you, rather than doing a needs analysis for a client's individual circumstances and needs.
