2014 – Year of the Horse – promises a fortunate year bringing luck and prosperity. Confidence in the property industry is on the rise as many predict a new recovery. Finally the property cycle (at least in some sectors) has turned and once again real estate will become the asset class of many: first home buyers; investors; superannuation funds and managed funds. Developers may once again rejoice, though perhaps to conservative refrains.
Of course decisions about property have to be tempered with what the law will let you do.
Here is a snapshot of what to expect in 2014.
Superannuation
Real estate seems set to become the asset class for investment and there are good signs about price growth in the residential market and a spike of activity in residential construction. The continuation of this activity largely depends upon the support from banks to provide construction funding and the availability of alternative project finance.
There are numerous residential project development applications lodged with Brisbane City Council, which are currently being assessed. If the majority of these are approved, and built, then developers will undoubtedly turn to self-managed superannuation funds as potential buyers. At present, self-managed superannuation funds represent a relatively low percentage of those owning investment properties. Whilst many superannuants have enjoyed unprecedented growth in super, many may return to real estate because of signs of increased yields and capital growth, especially in Brisbane.
SMSFs may invest in property indirectly by purchasing units in an unlisted property trust or through real estate investment trusts but SMSFs may also invest directly in real estate.
One of the limitations however, is the extent to which an SMSF is permitted to borrow money to purchase real estate.
The rules are complicated but not a complete hurdle to investment and an SMSF is not prevented from borrowing money provided that the arrangement entered into satisfies the conditions specified under the Superannuation Industry (Supervision) Act 1993 (Cth).
Broadly speaking, the borrowing must be for the acquisition of a single acquirable asset, the loan must be used to purchase an asset that is held on trust for the SMSF, the SMSF must receive a beneficial interest and the right to acquire the legal ownership of the asset in the future and the lender's right to recover the loan for any default is limited to recovery from the specific asset (not from the super fund's other assets).
Real estate agents will need to be careful when recommending investors use SMSFs to invest though, as, in ASIC's view, they are providing financial product advice and need an Australian financial services licence.
Planning and Development
- Operational Works – Fast tracking
Schedule 12 of the Sustainable Planning Act 2009(SPA) sets out the requirements for operational works applications. These applications are considered by the local authority. Private sector consultancies do have sufficient skills and capabilities to consider some applications and to provide for a faster assessment process of low risk compliant development applications. This year, we expect more selected self-certified operational works development applications to be assessed by accredited consultants.
This is intended to reduce development assessment time frames and provide clients with information on eligibility criteria and assessment requirements for low risk applications that are suitable for the process. Approvals are subject to standard permit conditions only but this does improve the overall understanding of how the application assessment works and, just as importantly, applications can be finalised within a 5 business day period.
- SealSMART
Another fast tracking device has also been introduced. SealSMART is a process aimed at fast tracking plan sealing applications through enabling self-certification of applications by accredited consultants.
There are a small number of accredited consultants in Brisbane and they have been involved with this programme from inception. These consultants liaise with the local authority plan sealing officers to determine suitable applications and agree on certification requirements for each condition.
The accredited consultant, if necessary, engages other professionals to ensure that all relevant development conditions have been complied with. If the application meets all requirements, SealSMART survey plans may be endorsed within 5 business days of payment of the plan sealing fees. This reduces current time frames by approximately 20-25 business days.
Environmental Upgrade Agreements (EUAs)
The property industry is nothing, if not innovative. New ideas and solutions to an ever changing environment are a constant. One recent idea relates to building refits and how to pay for them.
Under EUAs, financiers fund a building owner's water, energy or other environmental upgrades. The local authority then recovers the loan through rating, and this services the repayments to the financier on the original funding. The local authority may take a charge on the land for the funding.
EUAs are designed to make it easier to access finance for environmental improvements to existing commercial, industrial, strata scheme and multi unit residential buildings. It is being investigated by the Brisbane City Council as the Council revises the City Plan. Recently the Property Council of Australia raised the question of using this device to reignite interest in older office buildings.
Tenants of commercial buildings may be asked to contribute to this device (for instance through payment of outgoings as a contribution to rates and taxes) but presumably this will only succeed if any additional operating expenses are offset by reduced energy and water accounts.
ClimateWorks, in partnership with the Sustainable Melbourne Fund and others, are developing a business case for EUAs with the aim of accelerating the adoption of energy efficient retro fits in the property market. This will also raise awareness for adopting EUAs as a means of accessing finance for energy efficient improvements to properties.
The Clean Energy Finance Corporation has also supported EUAs for the planned Melbourne Metropolitan Planning Strategy.
EUAs are described as innovative mechanisms for financing property upgrades to improve energy, water efficiency, reduce waste and reduce greenhouse gas emissions. They also seek to overcome the market barrier between building owners and tenants. Initially a lender may have thought that financing an upgrade will not create any real benefits but several banks have now supported the use of EUAs.
PAMDA
- Cooling off
Most people are aware that there is a "cooling off" period for the purchase of residential property. However there is a termination penalty for terminating a contract in that period.
Section 370A of PAMDA regulates this and provides that the seller may deduct from any deposit paid under the relevant contract an amount not greater than the termination penalty. The termination penalty is 0.25% of the purchase price.
A recent decision in QCAT (Lucy Cole Prestige Properties Broadbeach Pty Ltd atf Gaindri FT Trust t/as Lucy Cole Prestige Properties Broadbeach Pty Ltd and Anor v Kastrissios [2013] QCAT 653) decided that a buyer who cancelled a cheque to pay a deposit had effectively paid the deposit so that the buyer was liable to pay the termination penalty, which was recoverable as a debt even though the amount could not be deducted from the deposit because the cheque was cancelled.
Perhaps it would have been preferable if section 370A had stated that the buyer is liable for the termination penalty for terminating the contract at any time during the cooling off period (or the shortened period), whether or not the buyer pays the deposit as agreed under the contract or paid by cheque dishonoured on presentation.
On the present reading of section 370A(3) this still may be an issue for an unpaid deposit, in the absence of an express statement of liability in the statute to make the buyer liable for the termination penalty and that it is recoverable as a debt. In contrast, section 370A(5) provides that an amount payable to the buyer (by the seller) under 370A(4) is recoverable as a debt.
These provisions remain unchanged in the new Property Occupations Bill 2013 mentioned below (though the form of notice required has become less prescriptive).
Of course one might also question whether it is fair for any termination penalty to be imposed. If the intention is to allow a buyer to "cool off" and terminate, why should the prospect of paying a termination penalty influence that decision? Termination penalties have no place in consumer protection legislation for real estate transactions. Indeed "penalties" are generally not enforceable at law so the very use of the expression "penalty" is curious.
- New legislation
If passed by Parliament, PAMDA will be replaced this year by 4 new pieces of legislation:
- Property Occupations Bill 2013;
- Motor Dealer and Chattel Auctioneers Bill 2013;
- Debt Collectors (Field Agents and Collection Agents) Bill 2013; and
- Agents Financial Administration Bill 2013.
The amended legislation has been introduced as part of the Queensland Government's commitment to "reduce red tape". Importantly for property developers, significant changes have been made to the contracting process for residential property. The Form 30C – Warning Statement will no longer be required – replaced with the requirement to include the following words in the contract, once, directly above where the buyer executes the contract –
The consequence for failing to comply with these new provisions will be a maximum penalty instead of a termination right. Unfortunately, as this clause currently stands, a deceived buyer is left with no statutory remedy.
The proposed legislation also:
- deregulates the maximum commission payable for residential and rural property transactions;
- Simplifies the appointment of agents – there will be 1 approved form for all types of appointments;
- abolishes the Property Developer's Licence and Property Developer Director's Licence (Queensland is the only Australian jurisdiction currently licensing property developers); and
- allows the cooling off period to be shortened or waived without the need for a lawyer's certificate.
Regional Planning Interests Bill
The Bill is new legislation proposed by the Queensland Government aimed at ensuring the impact of resource activities and other regulated activities on areas of "regional interest" is assessed and managed. These areas include priority agricultural areas – which will be shown in a regional plan as a priority agricultural area or prescribed under a regulation.
This Bill has been referred to the State Development, Infrastructure and Industry Committee, who are required to report its findings to Parliament by 17 March 2014.
For further details please see our article: Priority agricultural areas: Regional Planning Interests Bill.
Retail Shop Leases Act Qld
The Act is under review and although public consultation and submissions are over it's not expected that amended legislation will be introduced until later this year.
More changes to come
The industry was advised last year that the Queensland Government has commissioned an independent review of Queensland's property law, including the Property Law Act 1974, Land Sales Act 1984 and the Body Corporate and Community Managment Act 1997.
We will provide you with further updates once the first issues papers are released.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
