Off the plan properties often carry high risk, but how can we detect a good one?

Even with the uncertainties of the current real estate market situation in Australia, statistically, some of the young and inexperienced investors still feel more secure to invest in off the plan (OTP) properties such as apartments, houses and land rather than established properties or the second hand markets.

There are rational reasons that make OTP properties the preferred choice. Brand new properties attract more tenants and have relatively high rent. They have an additional source of cash flow, which comes through higher tax return from property depreciation, and the total maintenance value is significantly lower in comparison to established properties. Buyers too tend to feel more secure to purchase new properties and would rather deal with the growth aspect later on.

But as an investor, when you buy OTP properties or a completed one, you need to understand all the risks that will help you achieve investment success.

Given the fact that the vast majority of current OTP properties are located in high-risk areas, they generally carry higher risks and deliver lower returns as compared to existing properties. As an independent risk analysis company, RiskWise conduct detailed research into OTP properties to determine the best investment attributes.

All new properties look great, so how can you tell if one is better than the other?  

Most marketers and investment firms only talk about the quality of the building, the track record of the builder or the developer, and the architect’s reputation and past projects. However, we compare low-risk OTP investments to high-risk investments with other sets of arguments to make sure we get a good deal. The quality and success record become secondary.

According to Riskwise algorithm and analysis, there are seven key factors that determine the performance of OTP properties.

1. Economic growth

Economic growth is the number one success factor. Suburbs located in a region with sustainable economic growth outperformed the national benchmark in 90 percent of the cases – delivering an average five-year growth of 48 percent.

However, only 43 percent of the suburbs with no sustainable economic growth outperformed the benchmark – delivering an average five-year growth of just 10.4 percent.

Riskwise assessed the potential sustainable growth in each area in Australia, so unsurprisingly, top OTP areas are in Sydney, Melbourne, Greater Brisbane and southeast Queensland.

2. Lower supply

A low proportion of new properties have a strong correlation with robust capital growth. They outperformed the benchmark in 85 percent of the cases, delivering a five-year growth of 50.3 percent.

On the other hand, areas with a high proportion of new properties outperformed the benchmark in 63 percent of cases, delivering only 30 percent capital growth within the period.

Riskwise analysed the aggregated number of new dwellings in each area and identified the top 100 danger zones across the country.

Besides inner-Melbourne and inner-Sydney, the list contains a large number of suburbs that were somewhat surprising, such as Brunswick in Melbourne and similar suburbs.

3. Middle-ring

Middle-ring properties delivered a stronger capital growth than properties within the CBD, where there is an abundant supply of properties.

About 83 percent of the suburbs in the middle-ring outperformed the benchmark, delivering an average of 47 percent capital growth.

Properties within five kilometres of the CBD met the benchmark by only 53 percent of the cases, delivering an average capital growth of 22.3 percent.

4. Higher medians

OTP properties in the suburbs with a higher median price generally outperformed suburbs with a lower median price. Some 85 percent outperformed the benchmark, against 70 percent in the suburbs with lower medians.

These suburbs are more family-oriented, therefore large units had proven to be excellent dwelling preferences.

5. Lower prices

For OTP units that cost less than 45 percent of the median house price in the suburb, the capital growth was generally higher than apartments where the median price was 60 to 70 percent of the house price.

6. Fewer renters

OTP properties in areas with a renter ratio lower than 50 percent delivered a five-year growth of 41.6 percent. However, suburbs with a renter ratio higher than 70 percent had an average growth of 22.3 percent over five years.

7. Houses outperformed

OTP houses outperformed OTP units in the same area. For example, homes in Baulkham Hills (Sydney) had a five-year growth of 84.8 percent as compared to units at 51.9 percent – although in both cases the number of new dwellings was around 2,000.

More factors are taken into account when we detect low equity or cash flow investment or owner-occupier dwelling, but these seven factors should be sufficient for you to determine if the suggested opportunity is good enough or if you are getting reliable data from the provider.

In most cases, unfortunately, their data is skewed, and the interest of the property advisor or the property investment firm is in the deal and not on the actual investment that should help you to make money or create wealth in the long term.

Investinproperties has helped thousands of investors to get the right property – old or new with proper risk management. The tests above are used as the only source of evidence that will help you to make the best investment.

There is no magic in buying real estate, and a long term approach can help to mitigate the risk. However, the majority of the new or OTP properties are associated with high risk, hence poor returns are expected in the first 15 years or more. The only way to gain yearly or short-term equity is to find low equity risk real estate that will help you to make substantial capital to accelerate your property portfolio.

Contact us if you want to be with those who are in the know. With us, you can be sure to be on top of what you buy.