Financial advisers and regulators warn that buying properties off-the-plan carries extra risks. (ABC RN: David Lewis)
The expression “safe as houses” is now meaningless to property investors Matt and Peter.
The two men both invested in newly-built apartments via the same Sydney-based property research and investment firm.
The experience is an ongoing financial nightmare for Matt, whose dreams of buying a home to live in have been put on hold because the debt on his investments is worth more than the properties.
“Recently my wife and I were interested in possibly purchasing our first home in Sydney, so thinking about selling both investment properties,” he tells RN’s The Money.
“I rang my real estate agent in Townsville and she told me that it probably wasn’t the best time to sell because the exact same property that I have recently sold for $150,000.”
Matt bought his apartment new for $289,000 around six years ago, on the advice of the firm.
In 2016, he paid $504,000 to buy a one-bedroom flat on Lygon Street in the inner-Melbourne suburb of Brunswick off-the-plan. When it came time to settle last year, the bank valued it at $450,000.
Again, it was on the advice of the same property research experts.
For Peter, one investment through the company was more than enough.
He paid close to half-a-million dollars for a flat he now estimates to be worth around $400,000, based on the rents he’s receiving, which keep falling.
“It did come with a rental guarantee — so, for the first three or six months we received $495 a week,” he explains.
“As soon as the rental guarantee finished, the property dropped to more of a market value, which was around $470, and every time a tenant moves out the rent drops.
“We’re now down to about $430 and the real estate agent is saying to me: ‘You’ll get more options [for tenants] if you drop it to $410 or $400.'”
Planners, accountants, brokers make big bucks
Even though residential real estate has generally been a strong investment for people over the past few decades as Australia went through its biggest ever property boom, plenty of people have lost money, especially buying off-the-plan or new developments.
But what is truly disturbing about the cases of Matt and Peter — and thousands of others like them — is not that they bought new properties and lost money, nor even necessarily the ‘investment’ seminars that convinced them to do so.
Rather, it’s how they came to be at those seminars.
When Matt told his then-accountant about a $30,000 inheritance he’d just received, the financial professional sensed an opportunity.
“He invited me to an event — I guess you could say networking, but it was a property event — to possibly spend that inheritance on a brick-and-mortar house,” he says.
In Peter’s case, it was his then-mortgage broker.
“My business got really, really busy and because I was so busy I had some cash that I wanted to invest,” he tells The Money.
“My partner at the time also was pregnant and we were going to have a child and we thought, ‘Oh we better do something quickly to invest some money we had,’ and time was very limited.
“Our mortgage broker/financial adviser at the same time reached out and said: ‘There’s a seminar coming up, would you like to come along?'”
Peter later learned from some of the documentation around his purchase that this broker had received $4,000 in exchange for that referral. Matt isn’t sure what his accountant got out of the property sales, but is quite certain he received some payment.
Independent financial planner Bruce Brammall, based in Melbourne, says he’s constantly receiving offers from developers and the property ‘research and investment’ firms they sometimes use as sales agents.
While he bins them, he’s concerned others succumb to the temptation.
“Way too often, large amounts of money [are] paid to hangers-on in the industry or people such as financial advisers or accountants or mortgage brokers to assist in finding clients to purchase the development properties,” he observes.
“They can be up to 7, 8, even 10 per cent of the value of the property.
“It wasn’t rare, and it certainly was happening in Melbourne in the last couple of years, where an $800,000 property may well have had a $70,000 or $80,000 commission paid to a financial adviser, mortgage broker, accountant, etc.”
Lawyer Michael Catchpoole — a partner at major firm Corrs, Chambers, Westgarth — says the scale of these payments can mean consumers get conflicted advice that isn’t in their best interests.
“More often than not, these seminars are free because they’re effectively promotional,” he says.
“Where it becomes murkier is where those commissions are sufficiently large that there’s a sell-at-any-cost culture associated with them.
“Or, alternatively, where there’s confusion or expectation in the mind of the purchasers that the property seminar provider is acting in their interests or is an honest broker.”
Mr Brammall says the sheer size of these commissions, as well as the advertising costs and developer’s profit margin, are the main reasons why most off-the-plan or newly built properties are terrible investments.
“Property spruikers, property developers are there to do one thing and one thing only, and that is to make a profit,” he says.
“The majority of the time — whether it’s inside a self-managed super fund or to those who are purchasing in their own name — the cost becomes pretty clear fairly early on and it’s largely been a disaster.
“I have not seen good stories come out of the property development industry.”
Talking about his property investment mistakes is an emotional experience for Matt, as he ruminates on the implications for his financial future.
“All I can do is work hard between now and whenever there’s light at the end of the tunnel,” he says, choking up.
“Hope to be able to pay off the mortgages one day, and maybe still be at a loss but at least not have the mortgage cloud over my head, and just that sting in the back of your throat when you have made a bad investment.”
Self-managed super funds are an attractive target
While Matt and Peter purchased their properties as individual investors, some people with self-managed super funds (SMSFs) are also tempted into these kinds of real estate investment, and others are even encouraged to set up an SMSF to buy.
- ATO figures show there are almost 600,000 self-managed super funds in Australia
- Between them, these funds have assets of $748 billion, more than either industry funds or retail funds
- ASIC says it takes around 100 hours a year of work just to meet the basic legal compliance required for an SMSF
- The Productivity Commission found that $500,000 is a reasonable minimum balance to consider setting up an SMSF due to the costs involved
Australian Securities and Investments Commission commissioner Danielle Press says putting all your retirement eggs in the one basket of residential property is very risky.
“We know that property prices go up and they go down, we know that superannuation should be a diversified portfolio, so across a spread of different assets, and if you’re holding a single asset in your retirement fund then you are exposing yourself to significant risk,” she warns.
This is one reason why ASIC has taken legal action against property investment advice firms to restrain them from encouraging people to invest through setting up SMSFs.
Another reason why ASIC has targeted this practice is that it is one of the few areas where these firms can actually breach the law, because many of their activities are beyond regulation.
That is because real estate is not defined as a financial product in the Corporations Act that ASIC enforces, meaning that virtually anyone can provide advice about it without requiring an Australian Financial Services Licence.
“The financial advice sector is regulated by ASIC, so we are looking very closely at the advice that’s given, we’re monitoring that, and we ensure that licensees are reputable — or try to ensure that licensees are reputable,” Ms Press explains.
“Property advice is carved out of that legislation, so they’re not covered in the same way, which means that the quality of advice and the best interests duty may not exist to the same degree.”
Private civil litigation is also not a realistic option, according to Mr Catchpoole, who says “there is effectively an immunity for the promoters of those schemes”.
“The litigation process for private individuals is prohibitively expensive, is time consuming, it faces a number of barriers because it is not necessarily a clear-cut case that someone who’s promoting a particular property has contravened the law in a way which is compensable,” he says.
“Often these claims are borderline uneconomic, because they’re not of sufficient amounts to justify the legal costs, and often the people who have these claims are not necessarily in a position to pursue those costs because they don’t have access to funds.”
Even if an investor wins against such a firm, there is every chance it has minimal assets to pay any compensation and the individuals behind it will simply set up a new company to keep operating.
Ms Press says that means consumers need to ask some questions if they are referred to property research or advice firms and their seminars before they part with any money or commit to an investment.
“I’d be ensuring that that adviser is not linked somehow to the property or property developer that they are asking you to invest in,” she suggests.
Mr Brammall has simpler advice.
“I’d recommend people run a million miles.”