Property investor

Those who signed up off-plans in the boom and are trying to get out of their contracts had better watch out

WITH VALUES in the new homes sector still to bottom out there are signs of increasing tension between a few developers and some of their clients who booked properties at the top end of the market and are now reluctant to pay the full price for them.

The conflict is mainly confined to the more expensive apartment schemes in Dublin where prices peaked in 2005 and 2006. Hundreds of two-bed apartments were sold off-plans in those two buoyant years at anything from €450,000 to €650,000 but once the market took a sudden dive, values dropped by between €100,000 to €200,000, depending on the timing, the original price and location.

The industry traces its change of fortune to October 2006, when the then minister for justice Michael McDowell effectively knocked the residential market out of gear by questioning the sustainability of our punitive stamp duty regime. It triggered a slowdown in sales but, as the banking crisis developed and people began to realise that our economy was in serious trouble, apartment prices tumbled rapidly by between 30 and 50 per cent.

The recent launch of new two-beds in other Dublin locations at relatively low prices – €200,000 to €250,000 – has served to remind us of how much the industry had lost the run of itself in the boom years.

With the market now in the doldrums, the immediate concern of developers is not so much the outstanding bank borrowings on sites but the urgent need to finish off new units already booked and then getting paid for them. Oh, how the bank manager will be impressed. Happily for the builders, most clients have played ball – some after getting fairly generous concessions – but there is still a sizeable number (many of them hardened investors) holding out for substantial discounts or, at the very least, the right to walk away from deals with their deposits.

One of Dublin’s largest new homes agents says that in one city development with 200 apartments in the first phase, more than 50 per cent of the sales have been wrapped up but there are still between 35 and 40 people who paid 10 per cent booking deposits and have “tried every trick in the book” to get out of their legal contracts. Some purchasers, he said, seem to have forgotten that the legal contract was a “two-way street” – had market prices continued to rise, the developer would not have been permitted to bump prices up. “In a good market it would be possible to return some of the deposits but not in this difficult business climate. The reality is that in some cases the banks are calling the shots, not the builders.”

One Dublin developer has already issued court proceedings against 20 clients to compel them to complete the transactions. Others are threatening defaulters with the same action but the reality is that most or all of them will only go to court as a last resort. Sales staff on most sites have been encouraged to open negotiations, where possible, with buyers reluctant to complete the deal.

A common complaint from purchasers is that while they have already been approved for a mortgage, up-to-date valuations by the bank are showing that the properties are worth significantly less. And it isn’t easy to find the balance of the money when personal borrowing from the banks has virtually dried up. In these cases, developers are clearly having to either take a hit or come up with some novel ways of getting their hands on outstanding balances.

Some buyers are being offered help in raising the required funding, others are being given the option of deferring part of the payment, like the cost of a parking space which can be rented instead for a number of years.

Should any of the defaulting cases finish up in court, the list of defendants will be carefully picked. A builder is unlikely to chase a first-time buyer who has lost his job or an overseas worker faced with expulsion. No, they are likely to turn their vengeance on well-heeled investors who made a killing during the boom years but who, like most of us, did not foresee a full scale crash.