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Developer commissions are fuelling Australia’s apartment glut
The Australian 7:15am June 13, 2016
Alan Kohler
We seem to be arriving at the final stage of the apartment bubble, which is where all concerned have pedalled out over the cliff edge but are unaware that the ground has disappeared, and are held aloft by pure hard sell.
A couple of brochures landed in my inbox a few days ago offering “incredible developer incentives” for new apartment blocks in Melbourne, Brisbane and Perth.
The first, in Racecourse Road North Melbourne, developed by Alpha14 Property Group, offered 8 per cent upfront commission, $10,000 “channel bonus”, developer to pay stamp duty, developer to pay $5,000 FIRB application fee.
That last bit is a clue to main market for these units: the brochures are being widely distributed, but especially in China, and the commissions are especially aimed at Chinese sales agents.
The “incredible developer incentives” are available to anyone, including Australian financial advisers looking to replace the investment trailing commissions that were banned two years ago the FoFA legislation.
But most Australian investors and advisers are wary about the apartment market these days and happy to watch.
The key market now is China, where there is an apparently endless supply of money looking to leave the country and an industry of sales agents making serious money from the upfront commissions paid by Australian unit developers.
For example, another block of units in Quay Street Brisbane, developed by Abacus Property Group, and comprising 78 one and two bedroom apartments with “stunning city and river views” from $352,000 per unit, is offering 8 per cent upfront sales commissions. That means an agent can make close to $30,000 selling a single unit, which truly is an “incredible incentive”.
The Banksia New Quay apartments in Melbourne’s Docklands, developed by
There’s nothing illegal about big sales commissions for apartments sold to investors, unlike for financial products, which were banned in 2014.
So if an adviser sells a fund that invests in residential units, no commissions of any sort — described as “conflicted remuneration” — are allowed. But if he or she sells a unit directly an 8 per cent upfront commission can be paid.
That’s because the legislation only covers financial products, not property. But should commissions paid on sales of units also be described as “conflicted remuneration”?
That depends on whether the agent is clearly described as a sales person or some kind of independent adviser.
The reason financial product commissions were banned is that the advisers who were selling them were presenting themselves as independent when in fact they were really in the business of selling. It was too late to change the labelling and perception of the financial planning industry, so sales commissions had to be banned and the focus of the industry turned to client benefit only.
However everyone knows real estate agents are sales people, and that they are getting a commission to sell a house. If you are buying a property, you know the agent is selling it to you on commission, not giving you independent advice on what to buy.
In fact, most sales — including advertising in this newspaper — involve some kind of commission.
According to the website localagentfinder.com.au, the average real estate sales commission across Australia is 2.22 per cent, with the lowest in South Australia (2.07 per cent) and the highest in Tasmania (3.26 per cent).
That’s the problem with the 8 per cent commissions offered by developers of new apartment blocks — simply that they are so much more than normal real estate sales commissions.
The question is whether at some point the size of a commission tips it over into a conflict.
At the very least it indicates that the buyers of these units are paying too much and are going to lose money: in effect they are rewarding the agent for selling to them because the commission is embedded in the price and once paid, it’s lost.
It also explains why there’s a huge oversupply of apartments in Australia now.