What are Sydney’s “million dollar ghettos” and where are they?
A short drive out of the city are a number of apartment blocks, just a few years old, that Property Observer recently visited.
The apartment blocks are investor dominated, rumours say by mainly offshore buyers and were built to attract high-paying investor clients – some around the $800,000 to $1 million plus mark.
Despite these price tags, however, the buildings are crumbling. Just Think Real Estate’s Edwin Almeida was shocked with the state the properties were in when he received a management from an offshore landlord.
Waterproofing issues, render coming away, broken lights and potentially compromised electrical work were just some of the issues he noticed in his first visit to the apartment block.
“Most of these property investors have never attended the property nor seen it, other than on glossy brochures and via the internet photos,” said Almeida.
“Sydney has made headlines as being the gateway into making the booming property market, a sure way to double your money and be in a safe political haven at that.”
When Property Observer visited, the issues were numerous and hugely visible. Readers are asked to remember that this apartment block is about four years old, and that achievable market rent on individual two-bedroom apartments was initially around $690 to $720 per week, despite some agencies asking for much less than this. Now, they're sitting around $620 plus per week.
Almeida explains that it was initially bought by an investor for $550,000 off the plan five years ago. Similar apartments in the area are now selling for $840,000 off the plan. Initially, the apartment was appraised at $720,000, however offers are not even being made at $680,000 due to the strata report detailing the issues in the apartment block. Almeida expects this will see the re-sale value drop to $650,000, which will affect comparables for new apartments in the area.
The one we visited originally cost $550,000 off the plan but this was five years ago. Like apartments are now selling for $840,000 off the plan.
In the bathroom of one apartment in the complex, the ceiling had previously collapsed (see photos below).
It's worth noting that while the tenant complained about this, the previous property manager did not fix the problem until the tenant stopped paying rent and the management was passed on.
Now in the bathroom, with the ceiling fixed for sale, the floor is starting to show signs of damage (see below).
This is a sign of compromised waterproofing, where the water pushes through from the shower towards the door - and brings sediment along with it. The metal rim that has been moved here, when you try to move it yourself, is solid - and quite incredible that leaking could have caused it to move away from the tiles.
Internally, cracks can also be seen appearing.
Outside the building, the issues were also obvious. Cracks and marks in the render had begun to appear - signs of movement and water leakage from the walls inside - and in some cases the render was coming right off the wall.
Heading to the basement car park, somewhere investors are urged to look at whenever considering buying an apartment block, the dampness is overwhelming. There are puddles, and there hasn't been rain for a couple of days. In fact, it's clear that it has been wet for a long time - the cement is coming away to the touch (see below) and the dipping is causing signs of rust.
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Almeida said that there are hidden liaisons between the real estate agencies and the developers that are a recipe for these ‘million dollar ghettos’.
To explain this, he draws a diagram before taking Property Observer to the apartment block.
In the centre, he draws a circle, which he calls the “developer”. He then draws a line out from this circle to the selling agent, to whom a commission is paid. Another line is drawn to the property management team, who offer the development with a 12 to 18 month rental guarantee – often insuring the investor will stay with them. He then draws a third line out to the strata management team.
Then he circles these three. They’re all from the one real estate agency, and this, says Almeida, is the ‘dangerous liaison’ making it possible.
“All such parties more than likely are a part of the same office,” he explains.
“Coupled with this, is the office relationship with the developers themselves. These are relationships that have created an underlying weakness in what I believe to be the catalyst that will inevitably crack the dam, and usher in the property bubble burst,” he says.
The selling
In his opinion is that the resales and valuations when the property purchases are funded by the local banks will see those who bought the new properties outright lose huge amounts of money.
He warns that for investors who do not visit the property post-purchase, who, in fact, buy sight unseen, are at danger in these situations.
He also warns that Home Owners Warranty Insurance is not in place when the complex is four levels and higher, and that he has still heard selling agents incorrectly tell buyers that their apartment will have their insurance for seven years.
The property management
After purchase, he says that the same agency then rents the apartments out. He warns that in some situations the properties are overcrowded and the tenants are not correctly screened – something he seems regularly when he takes over the management.
“Periodic inspections are next to non-existent,” he explains, saying that tenants have confirmed to him that the property manager has not seen the apartment since they moved in.
Bad management, and a lack of notice of any defects in the units – which would normally be fixed by the developer within 30 days if the investor claims – affect the maintenance of the property. The investor, after this time, will then have to bear the cost.
The strata management
Often, again, the strata management team is also part of the same real estate agency.
Checks for defects in common areas within timeframes required are not undertaken so cannot be claimed to the developer. This is then a bill footed by the Owners Corporation, again the investors.
But why do some agencies allow this to happen? It comes back to the developer.
The developer
Almeida notes that the developer gives high sales commissions to real estate agents to sell at high prices. These commissions could be in the range of 8% to 10% when sold off the plan.
When rectification works notices are not provided to the developer by the aforementioned professionals on behalf of the investor in the timeframes required, then they can make a good case that the damage is wear and tear.
A developer may also be able to liquidate their Special Purpose Vehicle (SPV) company.
Where is this happening in Sydney?
The locations identified are largely where there is a high concentration of highrise development. From the balcony of the apartment visited by Property Observer, there were others being built visible through cranes on the skyline.
Areas identified by Almeida as having these sorts of properties include:
- Mascot
- Hurstville
- Chatswood
- Strathfield
- Zetland
- Homebush
- Parramatta
Source: Just Think Real Estate
Not every development in these areas is going to fit the profile, and there may be good investment opportunities. However, Almeida specifically warns about apartment blocks where the vast majority are offshore investors.
How can you avoid buying into one of these apartment blocks?
Five top tips to help you avoid these situations:
- Do a background search of development/building company before purchasing
- Find out what Strata Management company takes care of the developments previously built by developer/builder
- Walk through other developments that the developer/builder has constructed and check for wear and tear as well as construction integrity
- Avoid buildings that are 4 stories and above as they do not have HOWI (in NSW)
- Avoid where and when possible, developments that are primarily rendered; they may be colourful and look good at first, but maintenance is costly.
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