Anyone with any interest whatever in property investment will be watching with increasing concern the battle emerging over the ill-fated Mascot Towers development in Sydney, as the debate over what to do next turns nasty.
Unfortunately, this is not a local NSW issue - this is a national issue, which centres on a situation that could be faced by any property investor when things go very wrong because an apartment project was never up to scratch.
The infamously “cracked” apartment tower at Mascot was not just badly built, it was clearly constructed in an appalling manner and this is evident from statements from the newly minted NSW Building Commissioner David Chandler, who castigated the construction but also said there was no need for specific new rules in this area.
With a $7m bill to be split among the owners of the tower’s 132 apartments, the owners are now seeking to negotiate a rescue deal with the state government. In turn, the state government has publicly blasted the residents for a “deliberate strategy” of trying to force the state to put its hand in its pocket for remediation.
Well, what else would you be trying to do as an apartment owner faced with a bill of up to $14,000 a month that ensures your investment has been instantly converted into a disaster?
Lawyers in the area, such as Adam Merlehan of the Merlehan Group, have described the current legal protections for property owners across Australia as “a mess”.
Most property investors would know that the residential market at present is very weak. They are probably aware that rental yields are going nowhere and prices are flat. They might have heard the industry forecasts that there is an excess of at least 40,000 apartments across the country.
No safety net
But few would realise the comprehensive lack of protection they might find themselves facing in a dud property development. For example, no defect warranty insurance policies apply to new properties over three storeys in any state. Other statutory protections apply in some states and not in others.
Separately, if apartments are purchased through a self-managed superannuation fund - and property is the outstanding attraction for many new SMSFs - the protections available to other investors are not applicable.
We cannot reasonably expect this situation to change in the near future. However, we can expect changes to be forced on the building industry that would mean at least if you take all the financial risks involved in buying into a building, then there is protection the building has been constructed to a reasonable standard.
In its comprehensive review of the building industry, the recent Shergold Weir report suggested a range of reforms. One outstanding proposal was the mandatory involvement of an independent structural engineer to report on any new building.
Doron Peleg, chief executive of property research group RiskWise, has suggested that an independent engineer’s report on new buildings would boost confidence across the industry. “Of course it will cost developers, but in this market they have to take a long view and believe everyone will do better with such a reform,” said Peleg.
All new regulations lead to extra costs, but the spectre of Mascot Towers and related debacles such as the concerns over “cladding” in tower developments is going to extract a much higher price from the building industry if it does not get its house in order.
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