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Buyer beware: the advice for property investors

Buyer beware is the advice for some property investors right now!

If you are thinking about buying a commercial property built before 1965, or a residential property built before 1965 which consists of two or more stories and three or more household units, then my advice right now is don’t! The same advice applies if you are considering buying an apartment within such a building.

The ‘shaky building’ syndrome looks set to cause much grief and costs for the owners of approximately 1,100 potentially earthquake-prone buildings in Wellington alone. That is just considering Wellington but all city councils must adopt a policy on earthquake-prone buildings in 2006 and so the ‘shaky building’ syndrome emerges.

The impacts on owners of buildings deemed as earthquake-prone are likely to be similar to the impacts of the leaky building syndrome.

The potential impacts of the ‘shaky building’ syndrome could be financially catastrophic for some owners even without an earthquake occurring.

The potential impacts as a result of the ‘shaky building’ syndrome include:

• Costs to strengthen residential buildings are estimated to be up to $50,000 per apartment so a two storey building with three apartments could cost $150,000 or more to strengthen. Commercial buildings may cost up to $100,000 per storey to strengthen to the new requirements.

• Values are likely to fall until strengthening is completed.

• Banks are unlikely to want to lend on earthquake-prone buildings.

• Banks may not even be prepared to lend to owners to undertake the required strengthening.

• Some buildings are expected to be demolished due to the prohibitive cost of strengthening work.

• Potential in some cases for the need for tenants to vacate buildings whilst strengthening is undertaken resulting in the loss of rental income.

• Insurance premiums may increase significantly on earthquake-prone buildings until they are strengthened.

Legislative changes, such as those that have created the emergence of the ‘shaky building’ syndrome, typically, have a temporary impact upon the traditional progress of the property cycle.

Whilst the ‘shaky building’ syndrome may well accelerate the property market into the expected property slump it is highly unlikely to herald a crash in property values across the board. An overall property crash is not anticipated because the economic key drivers which drive the property cycle still indicate a low level of risk of a crash in the near future. There are however some ‘niche’ markets exceptions to this which are still expected to suffer value declines in 2006-07 such as Auckland’s oversupplied CBD apartment market, some overpriced coastal property markets, some small towns and now ‘shaky buildings’ must surely join that list.

On the web:

WCC Draft Earthquake Prone Building Policy - Report_1_earthquake_policy.pdf and Appendices_1-5_earthquake_policy.pdf IPENZ - http://www.ipenz.org.nz/IPENZ/nzecal/ks.cfm

Property Market Analysts - http://www.hybridgroup.co.nz/a>

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