Off-the-plan apartments/townhouses and units have been getting some attention in Victoria recently after the government announced it would be slashing stamp duty in a bid to create more demand.
At first glance, this might seem like a good choice, especially for first-time buyers or those looking for an affordable entry point into the property market. However, the reality is that off-the-plan properties may not deliver the long-term value investors or owner-occupiers hope for.
One of the main concerns with off-the-plan apartments is the potential for oversupply. Developers often target areas with big population growth, building high volumes of apartments to meet perceived demand. While this may appear beneficial, it can lead to an oversupply of similar properties, saturating the market and limiting capital growth.
Buyers of off-the-plan apartments often find themselves in areas where there is little scarcity of comparable units. This can very easily hold down property values, making it harder for owners to see any real capital growth or sell the property at a profit.
As we know in real estate, the value of a property is heavily influenced by its land component. With off-the-plan apartments, the land value is often very low. For example, in a $600,000 apartment, the land value might only be $77,000, with the rest tied up in the building itself. Without any real land value, capital growth potential is significantly reduced.
The building will depreciate over time, and it’s the land beneath it that typically appreciates.
While government incentives like reduced stamp duty or grants may lower upfront costs, they can hide some of the other issues. These incentives are often introduced to clear unsold stock or stimulate activity in markets where demand is lagging. The very existence of these incentives probably should be a red flag, telling us that the property isn’t selling well on its merits alone.
It’s important to remember that incentives are temporary, but the property’s market value will define its performance over the long term. Smart investors would rather pay full stamp duty for a property with strong growth potential than be lured into purchasing a subpar asset because of short-term savings.
Off-the-plan properties are also priced based on future market expectations. Developers often price apartments higher to account for potential appreciation during the construction phase. However, if the market doesn’t grow as anticipated or experiences a downturn, buyers could end up with a property that is worth less than what they paid.
This adds another layer of risk that established properties don’t have. With established homes, buyers can rely on current market data to make better decisions, reducing the likelihood of overpaying.
Off-the-plan apartments also typically appeal to a small segment of the market, such as investors looking for depreciation benefits or first-time buyers drawn by incentives. This limited appeal can make it tough to resell the property later. In contrast, established homes or boutique-style apartments in low-density developments tend to attract a broader range of buyers, giving them a lot more resale potential.
For those considering an off-the-plan apartment, it’s worth exploring alternatives that offer better prospects for growth and stability. Properties with a good land component, such as houses, townhouses or boutique apartments in areas with development restrictions, often provide far better potential for capital growth.
On top of that, established homes allow buyers to assess the property’s true condition, neighbourhood appeal and market demand. With off-the-plan apartments, buyers are committing to a vision, not a reality.
If you buy the wrong asset early on, it can really slow down your property portfolio. Many first-time buyers, never get back into the market after their first purchase failed to deliver. By avoiding off-the-plan apartments, you will go a long way to starting out on the right foot.