Lessons from Christchurch: Property investors come unstuck

Over the past 2½ years, Christchurch’s business environment has challenged many assumptions and contracts. In a six-part series, Christchurch legal firm Malley & Co looks at some of the lessons all businesses can learn. Here, Carolyn Foss looks at how property investors were caught out by inadequate insurance.

While working through the extensive damage to residential and commercial properties in Christchurch, property investors and their legal advisors have uncovered several due diligence issues that lay dormant before the earthquakes.

Those issues highlight how crucial it is to get the right insurance cover, and why property investors nationwide should note some of the lessons from the Christchurch earthquakes.

A significant number of property owners were under-insured at the time of the earthquakes, particularly those with two-storey investments. These owners unknowingly had not recorded an accurate property floor area on their policies, which restricted cover to the recorded, not the actual, size of the property.

This may have happened for two reasons: they may have recorded an inaccurate floor area at the time of taking out their insurance; or they may have extended the property after the original policy was in place, but had not adjusted the policy.

Those owners whose properties had to be rebuilt have suffered financial loss because of the difference between the actual replacement costs and what they were covered for.

Some property investors have been unable to raise the necessary extra finance to replace their investment(s), others have reinvested in Christchurch, but with higher borrowings and others have taken the cash and invested in cheaper properties.

This issue is particularly relevant throughout the country, given the new sum insured requirement insurance companies are adopting. The worst scenario would be a property investor who has geared a property with 100 per cent finance but who has inadequate insurance cover. Not only could this place the investor at financial risk, it could also place the investor in breach of his or her banking covenants.

It is very important, therefore, that all property investors check their portfolio to ensure they have accurately calculated the correct floor area of each property, and if or when their insurer renews the insurance based on an agreed sum or agreed metreage that they have the appropriate sum insured.

This may mean getting an expert measurement, obtaining a valuation for the property that the insurer accepts as a basis for agreed value, or ensuring that the dollar per square metre cover noted in the policy is adequate.

You might also need to review the level of cover each calendar year because of increased construction costs or improvements or enhancements. If you are looking to increase your property portfolio, then it is important to include an expert measurement or insurance valuation of any prospective new property as part of the legal due diligence process, depending on the type of insurance being put in place.

Some other Christchurch property investors also suffered hardship because they had not informed their insurers they had tenants in place at the time of the earthquakes. Most competent insurance brokers will highlight the exclusions contained in a policy and point out some of the ongoing obligations of disclosure.

So, in summary, it is important to treat the insurance of any investment property very seriously. If in doubt, property investors nationwide should reflect on the hardship a number of fellow investors suffered in Christchurch, because they were not properly covered. For the sake of a few thousand dollars a year, are you prepared to take an unnecessary risk?

If you are unsure of the legal implications of an existing or proposed insurance policy then it is prudent to seek advice from a lawyer with the relevant expertise.

Carolyn Foss is a legal executive at Malley & Co, with more than 20 years’ experience in property law and conveyancing.

From the New Zealand Herald.

Sydney Apartments, where are prices headed

Got this from one of my news sources (BusinessSpeculator)

Australia’s largest apartment owner and developer Harry Triguboff explained that the Chinese had been major supporters of the Sydney apartment market after higher interest rates reduced local buying. But the Chinese were no longer big buyers of Sydney apartments. They had retreated because their currency is virtually tied to the American dollar and the big rise in the Australian dollar has made our apartments too expensive.

Moreover the Chinese were frightened that their own currency would rise, reducing the value of their investment and they had become nervous of the level of Australian apartment prices.

Triguboff believes that apartment prices are therefore going to soften while interest rates remain high and the Chinese are absent from the market.

Given Triguboff’s position in Sydney apartments, this is not a forecast to be taken lightly.

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Investment Property Expert comments on Investing

What types of investments are best?

There’s no one single right answer as each different investing strategy has it’s own pros and cons. It will depend on how much money you have,… see more  your appetite for risk, how quickly you’re trying to make money and how quickly you want to get there.

For most people that have a reasonable income, I believe the most guaranteed way to make wealth from property is to buy median priced properties in blue chip suburbs 5-15km from a major city i.e Sydney or Melbourne. The 5-15km location from a city is where the majority of people want to live that have high disposable incomes and there is a limit to how high you can build which limits supply.

Buying around the median price means that the majority of people can afford to rent it which means there is plenty of demand. That limited supply and increasing demand is the factor that causes price growth even if the economy is static.

When it comes to specifics on the property I would typically choose:

  • 2 bed units – easy for to people to pay $300/wk rent each for a two bedder as opposed to $450/wk for a one bedder, and most don’t want to share a 3 bedder
  • Parking – parking is a problem now and it will only get worse
  • Quiet st – no one wants to live on a busy noisy main road
  • Block under 12 units – it’s harder to get strata decision made if too many units. Boutique is also nicer to live in No lifts, gyms, pools – very expensive to maintain and tenants don’t pay more for them Second hand – new units sell for a premium and can’t be improved
  • Double bedrooms – no professional wants to be in a single bed
  • North Facing – the more sunlight the better
  • Balcony/Garden – everyone wants to enjoy some fresh air

I think a long term buy and hold strategy will give you a more guaranteed return as opposed to speculating and trying to find the next best suburb which may or may not grow. You can normally get more cash out by refinancing rather than selling and so as long as you can cash flow the property in the short term, you should make money in the long term.

Chris Gray