Apartment Investors – Is Your New Unit in a Sick Building?

apartment investors

Sick buildings – it’s a problem for many Australian unit buyers, although most don’t realise it.

Sick buildings are a term coined to describe a multitude of problems.  It’s to do with the way modern developments are constructed, certified and managed, and the lack of protection afforded to unsuspecting lot owners.

Here’s the thing.  If you purchase a new home, duplex, villa or unit in a low-rise complex (3 storeys or under) it comes with 7-year home owners’ warranty insurance. This means that structural issues, defects or subsidence problems are rectified by the builder.

However, if you opt for an apartment in a complex that is 4 storeys or more – you have no warranty at all.

Whilst in Australia developers/builders must abide by Building Codes, the move to private building certifiers has created the perfect environment for unscrupulous developers to flourish, as it’s easy to pay someone to certify your building.

Dr Jonathan Drane, an expert in property construction, believes problems often lie with new, inexperienced entrants to the market, who may set up shop just to do a one-off project.

These types of developers have flourished because it's not exactly hard to enter the market. "Anyone can be a developer," he says. "For buildings over 3 stories, the barriers to entry are low – it's largely unregulated and a license isn't required."

According to Property expert Edwin Almeida, in some cases the building codes are inadequate as the buildings are under-engineered for their location and purpose.

  • They’re often built on water tables or sandy soil – not a rock foundation, which results in a lot more movement. Most inner-city commercial high-rise buildingsare built on solid rock foundations and don’t experience the kind of movement you see in high rise developments in coastal areas.
  • Movement causes cracks, which compromises the waterproofing of a building and can cause render issues, seepage, and the “new asbestos” - internal mould.
  • Many buildings have inadequate mechanical ventilation for the building, despite meeting code. In these times of heightened security, many people keep windows closed, and in fact some buildings don’t have windows which can be opened – which means that lack of cross ventilation can exacerbate air quality issues.
  • And then there is the sheer weight of the building and the volume of inhabitants, which causes excessive wear and tear on the common areas. Yes, they are built to code, but under-engineered for how they will be used.

What if something is not right?  Is there any recourse?

The good news is that the Strata Act does provide recourse for issues to be fixed, but it’s limited. Here’s where it gets tricky.

Problem 1 – short time constraint

Although there is no home owners’ warranty, high rise buildings are protected by provision in the Strata Act – which means Strata Managers or the Body Corporate havetwo years to lodge an engineers’ report.  In reality, you effectively only have about 18 months to document any structural defects or issues in the building and provide a report to the Developer/Builder, as they need time to investigate and do the rectification work.

What if it takes longer than 2 years for issues to appear?

Often defects can be difficult or impossible to detect, and the consequences of a defect can often take years to become apparent. James Freestun, the senior vice president of Strata Community Australia's Queensland branch, cited an example of a case where the building's tiling had been done without a waterproof membrane. ("It leaked like a sieve," he said.)

Recommendations.

  • Before purchasing a brand new apartment, research the developer. See what you can find out about their previous projects and physically inspect them.  Maybe speak to a couple of owners to determine if there have been any issues.  Review strata reports, particularly the sinking fund forecast and any remedial works that are planned or completed.
  • After purchase, ask your Strata Manager or Body Corporate Committee if there are plans to have an independent engineering and building inspection undertaken within the 1st
  • If any issues are uncovered, make sure the Strata Managers submit the report through the right channels quickly to ensure there is sufficient time for the developer to review and undertake the rectification work.

Problem 2 – dangerous liaisons

Often the Developer, the Builder, the Sales Agent and the Strata Management company are all “connected”.  If you dig deep enough, you may find they are all part of the same corporate group.

What do you think the chances are that they will work together to get a report done on rectification work, and have it lodged within this short time frame?

Recommendation

Research the relationship between the Strata Managers, Sales and Leasing Agents and the developer.  If it all seems a bit cosy, table a motion for the Committee to consider appointment of an independent Strata Management company who is committed to representing the interests of lot owners, not the developer or builder.  This must be done following the right process – see our article Changing Body Corporate Managers.

Problem 3 – apartment investorsapathy

It’s estimated that around 80-90% of units in developments built within the last 5 years are owned by investors.  As they are not on-site, they have little (if any) experience of issues, or rarely get involved in body corporate matters.

The first time apartment investors know about it is when they receive notice of the Sinking Fund budget and 9 year forecast, and the levies they will be required to pay.  If there are any unexpected costs as a result of defects or issues that arise during the year, which were not considered at the time that the Administrative Fund and Sinking Fund budgets were completed, then a Special Contribution Fund may need to be established.

If the 2-year period has passed, it’s up to the owners to fund the rectification work.

Recommendations

Protect your investment – don’t rely on others to do it for you.

  • Always review your Body Corporate notices and see what is going on (or isn’t going on).
  • Voice your concerns to the Strata Manager or your Body Corporate Committee
  • Ensure issues are tabled and that correct procedures are followed
  • Question the budgets - is there enough money in the Sinking Fund to cover future capital costs?
  • Exercise your voting rights

Don’t wait till it’s too late

A UNSW research paper found that only 49% of those with problems had them fixed by the developer. So what about the other half? Either the developer had shut up shop (it's reasonably common for developers to use a single project company to manage the development), or was delaying rectifying the defects.

In the end, it’s your future capital gain at risk.  The value of your investment, and the size of your future maintenance levies will be impacted if structural issues are not identified and fixed, right at the beginning.  Nobody wants to be the owner of a future ghetto.

Note:  Tower Body Corporate is completely independent of any other business. We have no relationships with builders, developers, contractors, letting or sales agents.  Lot Owners, whether they be investors or in residence, are our valued clients, and their interests are our first priority.

Allan Clair

Allan Clair

We're quietly disrupting the Strata Management industry to provide lot owners with the type of ethical, efficient and friendly service that they want and are entitled to. Tower Body Corporate is totally independent. Our clients - Lot Owners, come first, always.

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