Construction Defects: What Does It Mean for Real Estate Investors?

Since its first evacuation in December 2018, the Opal Tower at Sydney Olympic Park continues to suffer the aftermath of the disaster. The Australian Financial Review announced that the building insurance premium was $ 2 million. Coupled with the most recent events at Mascot Towers, which remain uninhabitable due to structural risks, buyers and investors have begun to show the first signs of a vertiginous turn, while others are looking for ways to protect themselves .

As your investment property deepens the subject with Sharon Fox-Slater, general manager of EBM RentCover, we discover that even though there are certain security barriers to protect the investor during For a limited time, there is still a lot of ground that needs to be covered as a result of the recently developed concerns.

Fox-Slater says the incidents of Opal and Mascot Towers have finally revealed the vulnerabilities of builders and developers, as well as a lack of protection from buyers investing in these types of properties.

"Although the root of the problem is unclear, it is clear that these defects are not maintenance or repair issues," says Fox-Slater.

"These are problems that may have occurred behind construction, design, or supplies. And although defects may come from the construction phase or the original design, we find that they actually occur later in the life of the building.

"This means that some of these people who have invested hundreds of thousands of dollars in the purchase of their first apartment or dream home are now moving in the direction of financial uncertainty over the value of their property and may have to pay for expensive repairs. "

Fox-Slater adds that many defects can be difficult to detect and that many years can pass before the implications of a defect are fully evidenced. providing another problem for the investor.

EBM RentCover, a leading specialist in landlord insurance, is currently assisting a number of clients entangled in the financial difficulties caused by the Mascot Towers incident. According to Fox-Slater, it is common for stratum owners complexes, such as apartment buildings, to be confused with "who is responsible for what with regards to insurance".

Despite the intensification of the speech, which also highlighted some more detailed details of building insurance, the repercussions of recent events continue to infiltrate, which has the effect of reducing consumer confidence.

In fact, as Patrick Eather, General Manager of Thrive Homes, explains, more than half of the calls he received during the week came from people who had originally been on board -the- plan-apartment, but because of the turn of events, had changed in opinion.

"We also hear that the recent uncertainty surrounding the decline in unplanned building valuations as a result of the market downturn and delays in current residential apartment projects have also prompted potential buyers to look for alternatives, says Eather.

After answering clients' questions about the reliability of construction costs and whether there are any guarantees as to the quality and durability of the buildings, Mr. Eather states: "[buyers are] is clearly seeking a level of reliability higher, lower risk and a reliable investment level. "

Peter Koulizos, president of PIAA (PIPA) and lecturer in real estate law at UniSA Business School, says recent incidents at Opal and Mascot Towers have highlighted buildings for "all the wrong reasons," with confidence concerns occupying a central place.

"This negative publicity will affect apartment owners for a moment, especially those who own apartments in Mascot and Opal Towers. People are less inclined to buy this type of apartment, which translates into lower demand for apartments, which puts downward pressure on the price of apartments, "says Koulizos.

Insurance for Homeowners: When Are You Covered? And when are you exposed?

Fox-Slater says it's incumbent on the company to take out a stratum insurance that will cover the building, its common property and any common area content provided by the strata scheme. This is because the building structures are collectively owned and managed through the corporation, she explains.

"However, those who own investment properties in buildings generally require homeowner's insurance because the strata insurance does not cover the contents of dwellings such as non-equipped appliances and personal items, or risks such as loss of rent, liability. and damage to tenants, "says Fox-Slater.

In addition, when issues related to the construction of the building are in question, she states: "Many policies do not actually cover the cost of damage resulting from defective construction. This means that there is virtually no safety net for owner-investors who own properties in real estate properties such as Opal and Mascot Towers, which ultimately lost a tenant and income.

"This is only a recent development for this type of damage as more and more buildings do not meet safety standards. As a result, insurers are no longer willing to take the risk and withdraw from the market, as they are entitled to. "

In the effort to help their clients, according to the Mascot Towers incident, which Fox-Slater said was "effectively suspended financially," EBM RentCover's policy will cover investors for rent losses up to 52 weeks, provided that the losses resulted from the inability for residents to access the premises.

Tips for Investors: What Can We Do Now?

Fox-Slater advises buyers and investors interested in purchasing a high-rise building to conduct extensive research on developers and builders before purchasing, especially when is to acquire an apartment on plan.

To help minimize potential risks to the investor, Fox-Slater shares his advice:

Research the developer's and builder's story to find out about previous projects they've worked on. Conduct an on-site visit of these projects and discuss the quality of the construction with the residents.
Hire a professional to perform an independent inspection of the building. Fox-Slater says this is fundamental to the purchase of single-family homes and should be just as important as when buying a high-rise home.
Obtain a copy of the stratum report from the company, paying particular attention to the value and forecasts of the sinking fund, as well as any future and completed maintenance work. Fox-Slater indicates that your real estate agent should be able to provide this report, as well as the sales contract.
Find out what insurance is underwritten by the company to protect your property.

The New South Wales State Government is working to prevent such incidents from recurring, by announcing the creation of a special investigation commission on the level and quality of construction and any failures in compliance. For Fox-Slater, however, this is not enough; she believes that more needs to be done, including "a redesign of the country's construction industry regulations".

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