New apartments are the next trees

A few years ago, there was a plethora of “agricultural” “investments” – schemes where investors contributed their hard-earned money and a fund bought or developed tree plantations. The problem with these was that the commissions paid to the “planners” that sold these to the clients were exorbitant. In this article, you will see why I am cautious about the current trend in off the plan apartments.

I was chatting with a young property valuer the other day. He is flat out all day every day. Apartments, apartments and more apartments. He is contracted to provide cooky-cutter valuations of cooky-cutter apartments to a panel of banks, and he has a cooky-cutter conclusion too: on settlement the value of this property will be $X, with $X usually more than 20% less than the contract price.

Brisbane is the worst, with its apartment pipeline set to deliver far more completed apartments than can possibly be absorbed, leading to massive over-supply and free-falling values.

Sydney and Melbourne are not far behind, with Melbourne double cursed by lazy town planning leading to off the plan “slums of the future”, virtually unlivable, dog boxes in the sky. Thousands and thousands of them. 

Everybody knows this. It’s common knowledge. Just read the weekend newspapers. So why are some financial planners flogging apartments?

The developers and the marketers are desperate, offering commissions as high as 30%!

Think about it. If someone is paid 30% of a property’s purchase price what hope does that property have of being a good investment, and living up to its marketing hype? Not a hope in hell. It’s just not going to happen. For a financial planner to participate in this is a demonstration that they are lazy, cruel, and really dumb.

It’s dumb because a financial planner owes a general law duty of care to their client. They also owe three separate statutory duties to their client, being:

• a duty to act in their client’s best interests;
• a duty to provide advice that is appropriate to their client; &
• a duty to prioritise their client’s interests over their own interests.

In my view, to recommend to a client that they buy an off the plan apartment from a developer or a marketing company probably breaches each of these four duties (and if the planner receives an undisclosed fee from the developer or a marketing company they definitely breach each of these four duties).

And the final tragedy in such a saga is that if the client turns to the Australian Financial Services Licensee (‘AFSL’) of the planner and wants to lodge a professional indemnity claim for the poor advice, there is every chance the AFSL will not be insured for this claim: property is not a financial product.