Considerations for Offshore Investors Buying Apartments in NZ

Friday, May 1st, 2015
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Some time ago, we became familiar with an off shore property investor who got into a spot of bother.

He hailed from the northern hemisphere and was very green in the ways of purchasing property in New Zealand. He bought a one-bedder in Auckland for $350,000 and it was a long-term leasehold property.

What he didn’t know and what his then solicitor failed to adequately explain was that there was a ground rental condition that allowed the lessor to ratchet up the ground every seven years or so. Of course, that is precisely what happened – two years after he brought the property, the ground rental went up by a whopping 300 per cent.

On top of this, he had to pay the annual body corporate levy of $4,000 with a sprinkling of council rates thrown in, to boot. When he tried to sell the property, he couldn’t sell it for half the price as by that time, the $350,000 purchase had fixed annual outgoings of some $15,000 per annum.

It was a disaster; what was thought to be a good investment was actually a form of economic incarceration. Negotiations ensued with the financier and when the property was ultimately offloaded, and everyone copped a haircut.

There is more: a couple of years back, an elderly relation of mine bought a one-bedder for $250,000. At the time she purchased the property, she didn’t quite understand the real estate agent’s sense of urgency in closing the deal. Nor did she understand his heightened sense of “best practice client bed side manner” when with a clean set of heels he rocketed her down to the bank to sign on the bottom line and transfer the settlement proceeds so that he could get his mitts on the commission on the $250,00.

Alas, she had purchased what we in the Land of the Long White Cloud call a ‘leaky.’ Soon after she took possession, it dawned upon her that every unit holder in the development was required to kick in $100,000 to repair the water damage. Something had gotten lost in translation in that the 80-something had not prior to purchase been seized with the knowledge that she had bought into a leaky building.

So what do you have to watch out for when you buy apartments in New Zealand?

1. Don’t buy a “leaky”

In the 90s, thousands of homes were built in New Zealand that were susceptible to water penetration and water generated construction fabric corruption and failure. There has been a sad and lasting legacy flowing from the leaky building syndrome as many people lost life savings when they purchased a leaky.

There were many who, not being in the know, thought that they may have got themselves one hell of a bargain, but in fact had purchased a property that was rapidly deteriorating, some of which featured wooden beams that were slowly “morphing” into damp, spongy pulp. Some of these properties are still on the market and if you chance upon a property where the price seems too good to be true, proceed with care because that is likely exactly what it is, too good to be true.

Whenever I am looking to purchase a property in New Zealand, the first question I have of the agent is “is it a leaky?” There is often a pause, some reluctant hedging or obfuscation if you will, but invariably the answer is (awkward pause) maybe…you might need to check it out. To this, I always say without pause “adios muchacho.” Make sure you ask the agent if the property it a leaky. Make sure you get full and frank disclosure on point.

2. Some apartments in New Zealand are long-term lease hold properties, be they 50 or 100-year leases.

If the property is a long-term lease hold property, the lessors can often charge ground rents. Check the conveyancing fine print to determine whether you really do have title in perpetuity  rather than a long term lease, because if you don’t have the indefinite tenure in title that you thought you had, you may cop one of those tricky little ground rental hikes along the lines of our hapless friend mentioned above.

Before you buy, retain a damn good lawyer who lets you know precisely what you are buying so that you’re getting the treat and not the trick.

3. Earthquake resilience upgrade regulations

A year and a half ago, I was looking at a strata floor in a stunning period building. The building would have been prime reality in Melbourne or Sydney, but I was a little bit surprised at how low the purchase price was.

I rang a buddy of mine, a building controller in one of the councils. He said that there are “sunsetted” legislative provisions in New Zealand that dictate that all buildings will have to be brought into earthquake resilience compliance.

The net effect is that as some of the older buildings are not sufficiently earthquake proof, they must be brought into compliance at potentially a huge cost to the landlords. My buddy added that there is in New Zealand, particularly in the regional areas, a phenomenon called “demolition by neglect” where buildings are abandoned because the owners can’t afford the seismic resilience upgrade costs.

This would present as a surprise for the unsuspecting overseas investor or the punter as it were, for what would ordinarily be regarded as prime realty in their home towns for like purchases, in the location and aesthetic sense, could well be proof to be anything but.

Long story short, if you are looking to purchase properties in the Land of the Long White Cloud, understand that although a great deal of the as-built product is of a stellar quality, when purchasing apartments that were built in earlier decades, due diligence is important and conducive to a lack of potential surprises.

Make sure that:

  1. You get a good property or construction lawyer to thoroughly check through the paper work and the conveyancing documentations
  2. You deal with well regarded real estate agents who provide full and frank disclosure
  3. You get a pre-purchase inspection report from a well regarded building consultant
  4. If you want to buy a property, and when you pay the deposit – make sure there is a special condition or a term that dictates that settlement will only crystallise if due diligence and necessary inspections reveal that the property presents without blemish.
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