Why you should be cautious when buying off-the-plan

Investors thinking of buying a Melbourne, Brisbane or Sydney apartment should be very cautious.

And those considering buying off the plan should delay plans for at least a year. A glut of new high-rise apartments plus a drop-off in foreign buyers means prices are under pressure and are expected to fall further.

And our apartment building boom is not even over yet, with real estate analyst CoreLogic predicting completions will peak next year.

Over the next two years, about 231,000 apartments will be completed, compared with average annual sales of 108,000 a year over the past five years. This could lead to a spate of bargain-price apartments if investors walk away from settling on units that are worth less at completion than their contract prices.

The inner-city areas of Melbourne (14,353), Brisbane (10,189) and Sydney (9376) will have the biggest new supply. Wider Sydney and Melbourne will gain 81,696 and 80,503 new apartments respectively.

This sparks potential concerns, says Cameron Kusher, author of CoreLogic's report into apartment settlement risk.

"In many regions, capital growth for units has been substantially lower than that for houses. Many off-the-plan unit buyers would have expected capital growth between contract and settlement."

The problem has been exacerbated by some lenders tightening their criteria, meaning some off-the-plan buyers may be unable to borrow as much as they need. Some lenders have also increased interest rates for investors.

And some are no longer lending to home buyers from overseas.

While the circumstances in Melbourne, Brisbane and Sydney should make you cautious, it doesn't mean you shouldn't invest in these cities. But be doubly wary so you're not stuck with a property that, at best, will show very slow capital growth and, at worst, may fall in value.

Seasoned property professionals, such as Metropole's Michael Yardney, say the argument for investing in apartments is compelling. A significant proportion of our ageing population want to retire, downsize and travel, so apartments are an attractive option, he says.

At the same time our population is increasing and estimated to be 28 million by 2026. And close to 80% of the increase - 3.2 million people - is expected to live in the cities.

"This means we'll need to build about 1.72 million new dwellings in the next 10 years, of which 75% or 1.3 million will be in our capitals. And higher-density housing is easier to supply," says Yardney.

First-home buyers are also struggling, with some willing to compromise on their housing preferences, buying an apartment first. And Gen Y find apartments more convenient for their lifestyle.

All this adds up to greater popularity for apartment living and that makes them good investments. But the looming oversupply in the major cities means investors have to be very choosy, says Yardney.

"Some of the monoliths coming out of the ground are destined to be the slums of the future. There's a tsunami of failed settlements heading for our shores and many off-the-plan investors will get burned."

This is likely to result in a glut of properties hitting the market and investors who wait may well find the reward is bagging a bargain. Those who want to buy now should steer clear of off-the-plan projects, says Yardney.

"Look for an apartment in sought-after inner or middle ring suburbs, in a building that has a bit of character and a good proportion of owner-occupiers. And with capital growth likely to be lower in coming years, look for properties where you can add value through renovations."

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