Savvy Investors see big profits in new Strata Rules

Posted 13 August 2016

Category: Strata, Strata Reform

In just over three months NSW strata apartment owners will have more rights running, renovating and reselling their properties thanks to reforms expected to herald nationwide changes to property management and ownership.

Peak property bodies, property lawyers and state governments are lobbying for other states and territories to follow NSW’s lead in implementing some of the biggest changes to property ownership and tenant’s rights for decades.

Part of the revamp gives more powers to a majority of owners to overrule dissenters about selling the block. This, says David Bannerman, principal of Bannermans Lawyers, means investors will be “rubbing their hands” in anticipation of redevelopment opportunities. Bannerman has been involved in devising the reforms, which will involve one in four NSW property owners.

But some landlords are concerned at the prospect of complex new laws and increased tenants’ rights (including eased restrictions on pets allowed in rented apartments). They are also concerned about raising more funds for common property maintenance.

The changes come into force in NSW on November 30 and are expected eventually to be adopted, say Bannerman and the Property Council of Australia, by other states and territories which are closely watching their progress.

The major shake up of strata title rules is expected to encourage more intense development of inner suburbs and growth corridors leading into Sydney. That’s because it will enable collective sale, or development, even where there is a dissenting minority of 25 per cent. More development is likely to follow through to other capitals as the reforms are introduced elsewhere.

Adequate compensation

“Strata owners will be able to sell their property at market price and cash in,” says Bannerman. “Owners should be rubbing their hands because they are going to get a lot more money.”.

Under the new rules, says Jimmy Thomson who runs strata title website Flat Chat, only 75 per cent of owners have to agree to sell a building to developers. “If you were in an older building in a hot new area, you could certainly see the benefits as an investor of getting a good price for an apartment that probably wouldn’t reach that price if you were selling as is rather than as a knock down and rebuild proposition,” he adds.

But Patrick Bright, principal of EPS Property Search, warns private investors to educate themselves about strata title rules and responsibilities to anticipate potential problems.

“Just because you can turn a small apartment into a big apartment via redeveloping does not mean you are going to make a lot of money,” says Bright. “It still has to be in the right position, have the right zoning and be attractive to the right buyer.”

Also, there could be trouble if long-term apartment owners allege they are being forced to vacate their homes without adequate compensation to make way for profit-hungry property developers. Potential sellers need to be mindful of potential legal problems.

The new laws reform what are called strata titles, which allow people to own and have a title to individual units and apartments within buildings or complexes ranging in size from two to 700 lots.

Strata living increase

About five new strata schemes are registered each day in NSW alone and the number of people living, working in or owning a strata is expected to increase from about 25 per cent to half of Sydney’s population over the next 25 years. The trend is similar across the rest of the country. More than 40 per cent of all new homes in WA are strata title, according to the Property Council of Australia.

“Strata schemes are effectively small communities where the activities and attitudes of residents can have a significant impact on the satisfaction of others,” according to the NSW government.

While strata living can provide a friendly, safe, communal environment, there are big differences compared to owning a freestanding house.

Strata owners own their unit or apartment as well as sharing ownership and responsibility for common property, such as car parking, shared gardens and external security.

There are also by-laws that may affect whether an owner can do renovations, park their car on the site, dry washing and keep pets.

For investors, the “owners’ corporation”, which has responsibility for common property, manages a levy for running the building and a sink fund for future long-term expenses, such as painting and replacing gutters.

Simpler procedures

Friendships fray, neighbours niggle and corporations regularly become battle grounds when members fall out over financial responsibilities, renovations or plans to sell the apartment block.

“It has been a nightmare,” says a member of an owners’ corporation who clashed with other members about plans to renovate and resell a small, mid-20th century Melbourne apartment block to developers.

Under existing laws, the woman, a senior state bureaucrat with extensive administrative experience, needs to have unanimous agreement.

“Older residents are aggressively opposed to the plans and are campaigning to drive me out with their rude and threatening behaviour,” says the woman, who did not want to be named because of security concerns. She fears that by the time potential changes are introduced in Victoria, she will be too old to take advantage of them.

Under the new NSW laws, owners will be able to carry out “minor cosmetic work”, such as painting window sills, without the consent of the owners’ corporation. There will also be simpler procedures for “minor renovations” such as removing a carpet or installing a rainwater tank, heat pump or ceiling insulation.

The new rules on selling to a developer are a mixed bag for buyers. “There will be a broader range of options for someone owning a property or proposing to buy one, but if you buy a strata property, it might not be your choice when you sell it,” says Bannerman.

Scouring the suburbs

“Given the sums involved, the current property climate and amount of rezoning taking place, we are seeing this opportunity pursued aggressively,” he adds.

Cashed-up local and overseas institutional investors have agents scouring the suburbs for potential sites, particularly inner suburbs being rezoned or where new infrastructure is expected to create opportunities.

Rich Harvey, a buyer’s agent and founder of Sydney-based property buyer, says: “There is a world of opportunity in finding, re-doing and marketing apartment blocks. It is difficult to find the properties but can deliver a great result.”

Buyers’ agents, developers and self-managed superannuation fund investors seeking income and capital growth are looking for potential apartment blocks.

“It is often a difficult process,” says Harvey. “Many people living in an apartment for a long time do not want to sell for any money. But there is also the opportunity to sell for a premium price and not be over-shadowed by a big development built next door on a property vacated by owners who decided to sell. It is difficult but can deliver a great result.”

But EPS Property Search’s Bright says it’s vital to do your research before buying, particularly since there could be a problem with over-supply, which is less an issue in Sydney than other capitals. 

“If you own two apartments in a block of four, then it is probably a good idea to get a third [so you won’t get outvoted],” he says. “But with bigger apartment blocks, it is going to be more difficult. These new changes do not mean an automatic windfall. They could be if the building lends itself to redevelopment.”

Landlord obligations

Bright says it still comes down to demand, zoning and position.

For example, in Sydney there are several projects being planned, or underway, along infrastructure corridors such as Parramatta Road from Glebe to Haberfield to the inner west.

Alternatively, there are the light rail corridors in the east from Moore Park to Kensington and Randwick.

Investors buying apartments and becoming landlords need to protect themselves by ensuring they are across tenant’s rights and their own obligations.

Bannerman says investors need to protect themselves by ensuring each apartment has appropriate rules that are conscientiously enforced.

For example, an investment property owner was recently ordered to pay a tenant compensation for failing to contain cigarette smoke emanating from a nearby apartment. The tenant’s action was based on the landlord’s obligation to provide “habitable premises”.

Other by-laws can make an apartment more attractive to some tenants by being pet-friendly, or providing amenities for disabled tenants.

Review by-laws

“Owners need to review the by-laws for their building and if they are deficient, or not properly enforced, consider consulting with other owners with a view to convening a general meeting to make changes,” says Bannerman.

There are strict new obligations to common maintenance, including raising funds to cover a 10-year capital fund and strict liability on owners’ corporations for common property maintenance.

“Failure to comply may result in damages claims by a lot of owners,” says Bannerman.

“This may result in owners’ corporations holding more funds and buildings being fixed more promptly, which should minimise inconvenience.”

A date for the laws being introduced in other states and territories is not available.

Other state and territories are at different stages of implementation. The Victorian government is considering the 75 per cent threshold in its review of strata title legislation, a review is underway in South Australia and the Northern Territory is drafting a proposed review.

Some state governments, such as Western Australia, are already under fire from the Property Council of Australia for being slow introducing the changes.

The Council is lobbying the state government to introduce reforms in this parliamentary session.

Lino Lacomella, executive director of Property Council WA, says he does not want his state falling behind reform plans for other states and territories. “After more than five years of consultation and promises, it is disappointing that we are still no closer to achieving strata reforms in WA,” he says.

Author: Duncan Hughes

Image: Simon Letch

Date: 13/08/2016

Source: AFR

Publication: Australian Financial Review

Section: Real Estate