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How building defects could be a ticking time bomb for apartment owners

Jan 20, 2020 |ALISON CHEUNG

Most property investors would shudder to think about how to cope if a costly defect was found in their apartment.

And many may believe this is only a problem for those affected by the highly publicised Opal Tower fiasco which saw more than 3000 residents evacuated from the Sydney building in December 2018, only four months after construction was completed.

But it might come as a shock for some to know that residential building defects are a problem many investors could face one day, especially for those who bought a property built in the past 10 years.

How much do apartment building defects cost?

Research shows repairing defects in apartment buildings completed in the past 10 years could cost more than $6.2 billion, according to an analysis by Equity Economics, commissioned by the Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU).

That figure is tipped to “more than double when earlier years are accounted for”, a CFMMEU report Shaky Foundations wrote.

The main categories of defects are combustible cladding, water leaks, fire safety defects and structural defects.

How much does it cost apartment owners to fix building defects?

But what does this mean for individual owners? After all, for the average investor, an investment property is most likely one of their biggest financial assets.

The researchers estimated that apartments with defects at a moderate level could cost $5000 to $8750 per apartment to fix, while more substantial issues could set owners back $9000 to $60,000. The higher end of that bill is attributed to structural defects, which was what sparked the Opal Tower debacle.

Whether the defect is a small problem or a major issue, you can expect to fork out hard-earned cash to fix it.

Recently, a common cladding for apartment buildings, Biowood, was banned in Australia, as it was found to not only be combustible but could also cause a fire to spread across a building.

While the ruling was a win for the many owners who started the lawsuit, others are not as lucky. Those who own apartments in affected buildings but fall outside of the six-year limitation period will have to pay for the removal and replacement of the Biowood cladding from their own pocket.

And for those dealing with more general building defects, nearly 60 per cent of apartment owners were forced to put money into a sinking fund, while a quarter had to stump up special levies, a Mozo survey found.

What can a landlord do if they need to pay for building defects?

Godfrey Dinh, Founder and CEO of Futurerent, said while strata loans were another possible way to fund apartment building defects, there were a few drawbacks to consider.

“A strata loan is when the body corporate borrows money and is repaid by higher levies charged to the owners,” he said.

“One thing to note is that everyone in the building needs to pay for the works in the same way, which might not suit everyone. For example, people who have the cash may not want to borrow against the body corporate.”

“It also means higher strata contributions going forward, which might put off future potential buyers, impacting the value of the property.”

Alternatively, landlords can consider paying for the work from the upfront funds provided by Futurerent, which is not a loan but a lump sum of their future rent. Repayments can then be made through the tenant’s regular rent.

“Not everyone needs to use the same funding solution, so those with the money available who don’t want to borrow have the option to use their own money,” Mr Dinh said.

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Alison has written about property since 2015. Her work has been published by NewsCorp, Domain and Business Insider. Alison is motivated to help Australians make better property investment decisions.

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