Investing in a new development – is that necessarily the best?

Developers often lure investors to purchase the units they are building with good marketing, the joy of a brand-new property, no transfer duties and no transfer costs, and some hopeful claims of rental income and good yields. The developers often need to reach certain sales targets to access bank financing to complete their project and will sometimes offer very enticing deals to reach these targets. But is it worth it from an investor’s perspective?

On the positive side, a new development will have modern finishes, and in the better developments a whole suite of mod cons may be included, as well as communal amenities and benefits that may be attractive to some tenants. There is a strong hope that maintenance costs for the first couple of years will be minimal.

On the negative side a few important facets stand out:

• The development may not be centrally located. In their marketing the developer will downplay this aspect, or offer compensatory features like high security, but many tenants have a strong preference for staying somewhere close to many amenities and highways as this proximity enhances their quality of life. As a result, such developments will struggle to obtain good rental yields or even competitive capital appreciation.
• The body corporate will most likely not function well in the beginning. In the early years a new body corporate is often dominated by bigger personalities and those seeking influence, and seldom by those actually capable of doing the work required. As a result, the conduct rules are often not well enforced until some crisis brings about a change for the better. The developer’s estimate as to eventual levy costs may also be significantly lower than reality.
• When a development is completed, often a large number of units hit the market simultaneously to be rented out. Simple supply-and-demand economics dictate that average rental price will be lower than expected as this is often the only way to place tens or hundreds of tenants in a short space of time. This causes rental prices to be suppressed for 2-3 years, leading to poor returns for the investor in those critical initial years, and a prolonged period before cashflow break-even is reached.
• Sometimes criminal elements focus on new developments precisely because prices are lower and enforcement of rules lax. There have been many incidences of prostitution rings and drug kingpins exploiting this weakness to their advantage. Where this is not quickly noticed and brought under control, a complex can develop a negative reputation in the market that can take years to rebuild.
• Many developers cut corners with sub-standard workmanship or materials. Although they remain legally responsible up to 5 years after completion to address defects, in practice it can be very difficult and costly to compel them to honour their obligations.

On the whole, investors are recommended to not be fooled by sales talk and nice-to-have features that future tenants are unwilling to pay for and are encouraged to do their own homework with regards to expected yields. Very often a second-hand apartment in a more established complex will offer better returns and lower risks.