Monthly Archives: March 2016

The apartment markets are crashing; for unit owners the five stages of death and dying come next

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Two news articles in the past week herald the beginning of the long predicted inner city apartment market crash.

‘Melbourne CBD apartment values fall 30%, settlement fears rise’ wrote Michael Bleby, Australian Financial Review, 29 March 2016. A few hours later his colleague, Larry Schlesinger, reported ‘Melbourne developer turns to self managed super fund investors to fund apartment project’.

These twin themes, bad news on valuations and increasingly innovative yet desperate attempts to find alternative development finance, will repeat in the property press for some months or even a couple of years as this phase of the market plays out. The stories will come first as we have seen in Melbourne, then Brisbane, and then Sydney. It’s entirely predicable. The numbers never lie.

What happens next is also predictable; ‘off the plan’ purchasers will fail to complete their contracts as banks tighten lending criteria, developers will go broke, receivers will be appointed by the developers’ banks, new builders will be contracted to complete partially built buildings to a lesser standard than agreed with the purchasers. And those that settle will have defects to fix and will struggle to collect levies from owners with no equity left in their investment property.

There will be no winners, perhaps with the exception of the receivers and lawyers, but history suggests that the unit owners will be the biggest losers; some will lose deposits, some will be forced to settle and take big hits on value and others will be left to raise special levies to remedy defects in the absence of solvent developers to sue and government-mandated insurance to claim against.

But these are monetary losses. If the apartment investing class of 2016 only lose money, they will be lucky. There is much more at stake. Health, happiness, relationships and sadly even life itself will be at risk as investors ride the roller coaster of grief akin to the model put by the Swiss-American psychiatrist, Elisabeth Kübler-Ross, as the five emotional stages of dealing with the death and dying of a loved one.

First denial, ‘This can’t be happening. We worked so hard for this. We thought we were dealing with people we could trust. Our family home is at risk’.

Next anger. It will be directed to whoever they can find to blame, whoever they think made them make this investment; the agents that oversold, the bank that lent too much, the conveyancer that didn’t explain enough, the wife that insisted or the husband that was cavalier.

Bargaining follows. Little deals are done with one’s self, ‘It will all work out when the dust settles’,’ The government won’t let this happen’, ‘The media will bring us justice’. Bargaining buys time for us to deal with our loss.

Depression descends. Investors will become moribund, stop opening letters and bills from the strata manger, decline invitations to go to meetings with class action lawyers. Money will get too tight to mention.

And mercifully acceptance arrives, ‘This is my problem, no matter who’s to blame it’s up to me to do something. What are my options? They mightn’t be pretty, but there are always options’.

Savvy unit owners will be brave. They will face facts fast rather than wallowing in denial and false hope for too long while developers shift assets, wind up companies and let important time limits for making claims go rushing by. They will make realistic assessments of litigation prospects and strike hard while there might be something to be had, or they will save on legal costs to pay for their repairs. In litigation, there can be no half measures. But most unit owners won’t be savvy.

Responsibility is creeping up on hapless strata owners

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Buried Alive

There’s a thing happening in strata I’m going to call ‘responsibility creep’.

Ever so slowly strata entities are taking on more and more responsibility for things they aren’t able to handle.

Some of this responsibility creep is being forced on owners by higher levels of government, but much of it is self-imposed; well-intentioned, but nevertheless self-imposed. And the compliance burden is heavy.

The classic case of responsibility creep is for roads and parks transferred to strata and community titled entities by local government – under these arrangements owners pay twice – once in the form of rates to the council and once more in higher levies to their strata, as well as the administrative costs of risk of owning parks and roads.

Responsibility creep can come insidiously with calls for law reform. Take overcrowding for example. Strata owners complain of this happening in strata and the state government say “Okay, you can pass by-laws for that but you get to police the breach. Forget that this is the job of local councils with employees, budgets and accountabilities, and let’s give it to the people, so they can be responsible for who sleeps where.”

Over-zealous exercise of the by-law making power can also induce responsibility creep. In an over-the-top effort to regulate building work and renovations, all of a sudden an owners corporation can find itself second guessing local council development consent conditions and certifying work where others are paid to do this and enforce standards.

If strata management is getting too hard, and most think it is, then we need to call out responsibility creep whenever we see it.

Cut and paste by-laws are doing no favours for strata

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Experienced lawyers will tell you there’s danger in being confined by a bad draft. When a document is poor to begin with it’s hard to make it great. Sometimes it’s just best to start again with a blank piece of paper.

That’s what I did yesterday when asked to draft a by-law for a major renovation of a Sydney apartment. I’m happy with the result – it’s fresh, clear and tight. I’ve made it fair to both the owner and the owners corporation anticipating new strata laws later this year that will prohibit harsh and oppressive by-laws. I’ve also made sure it fits well with the conditions of the local council development consents without shifting the regulatory burden from the local council to the owners corporation.

By-laws, like other legal precedents, have a use-by date, not just because laws and community standards change but because there’s been more cutting and pasting of these documents than at a kindergarten’s craft time. Over time these precedents have become corrupted by different drafting styles and concepts.

New strata laws for NSW will force a one-off review of all existing by-laws within a year of the new laws commencing. Existing exclusive use and special privileges will be protected but everything else will have to be revisited and based on where I got to yesterday that will be for the common good.

Bill shock still Keeping electric cars out of strata

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In my book Growing Up: How Strata Title Bodies Might Learn to Behave one of the issues I look at is sustainability in strata. More often than not you’ll find that no matter how good an owner’s intentions are, it will always come down to the money.

As you see more Teslas and hybrid cars around the cities you’d be right to wonder ‘where are they going to charge that thing?’ While it’s early days yet I hear more and more about arguments in strata over whether people should be allowed to charge their cars using common electricity, and if so, how to charge them for it.

The first go that electric drivers had was estimating their usage and offering to reimburse their owners corporations. Nice in theory but it got complicated as soon as anyone else wanted to tap into common electricity.

It’s now possible to monitor a car-space AND automatically pay back the owners corporation. It saves the arguments over bills, but it’ll still going to come down to the electric car owner paying for the installation and getting the necessary by-laws written up.

With talk that we could be seeing driverless cars in North America in the next 20 years, what’s the next step for parking and power? I’m not sure but I can tell you it won’t be found in strata legislation, which is always lagging behind reality.

It’s all a good reminder that innovation isn’t going to come from stalled strata legislation, but from owners learning how to behave in strata.

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