Markets Boom And Markets Bust But Then What

It wasn’t that long ago and the mantra of property developers was, ‘build it and they will come’. Today we see in the news stories of heavily discounted apartments failing to sell at auction.

The Australian Financial Review reports today that the auction of the final 36 units in the Crowne Plaza Resort and Spa on Queensland’s Sunshine Coast failed to make a single sale, although post auction negotiations are continuing. A similar thing is being experienced on the Gold Coast, and I am told some student accommodation properties in Adelaide and Melbourne are struggling to find buyers.

Internationally we are seeing something of the same, massive discounts in Dubai and early concerns being expressed about the oversupply in China where massive towers stand mothballed without any tenants at all. Ireland conducted the first of its distressed sale auctions over the weekend and bargain hunters in the US have been busy for a while now. Advertisements have started appearing in the local papers for retail investment in Australian registered property trusts investing in USA residential property. When the retail trusts start buying assets, you can be sure the owners have nowhere else to go.

So what happens to common property in a building when a market fails? If the collapse comes partway through building the first thing to happen is that the new builder put in by the receiver looks for ways to cut costs in construction. Lesser quality materials will be sourced and pride in workmanship will slip as the focus moves from ‘brand consciousness’ by a developer/builder with a sustainable business to the ‘finish and flick’ attitude of a receiver interested only in covering the bank debt and the receivers fees. The effects of this change in mentality live with a building forever. The new committee inherits a mess and in larger buildings (generally more than three floors) without homeowner warranty insurance, the owners will be slugged financially for levies to fix what the developer ought to have delivered.

The next thing to happen is that the receiver will dump the unsold stock onto the market at once ensuring the entire building is devalued. Discounts of up to 50% are being recorded in some oversupplied Australian markets at present.

In my thirty years of professional life I have seen markets come and markets go, and I am sure of this; neither investors nor developers are capable of stopping when they have had too much of a good thing. An area we should be looking at for reform in is homeowners warranty insurance for buildings over three floors.

The assumption that these buildings are only constructed by large companies with a brand to protect is demonstrably wrong. Insurance to protect the investors from these major collapses will come at a cost to investors but maybe that is a price worth paying to ensure you get what you bargained for and don’t spend the first ten years of ownership clawing back value to equal what you paid when times were better.

Michael is speaking on insurance law reform for owners corporations and strata investors at the Owners Corporation Network (ACT) Public Forum in Canberra on Saturday 21 May 2011. Email vivien@teyslawyers.com.au to book your free seat.

 

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