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Unsold developer’s stock in letting pools

By Frank Higginson03 Apr 2009

One of the issues confronting people buying management rights businesses off the plan in a slowing property market is unsold developer stock.

Back in the ‘boom’ times, units sold like hot cakes, and come settlement time, there was basically no developer stock left. From a management rights purchaser’s perspective, this made buying the rights a relatively simple legal process – the letting pool was established, all lots in the letting pool were paid for, and the owner occupied lots weren’t.

The issue we are beginning to confront now with slowing sales is that developers are left carrying unsold stock for longer than they would like. There are some complexes which are still more than 60% unsold, well after construction has concluded.

For people that have already purchased off the plan, their contractual conditions will be set.

If you have bought off the plan previously, and are looking at doing so again, you must remember that the rules have changed. The days of developers accepting claw back arrangements of only three months are long gone.

Developers want longer term claw backs, and are seeking payment for some of the lots that they may let through the resident manager. Payment for lots that are developer owned is a commercial risk (because you never know what the developer will do with them), and also a funding risk, because banks do not like the concentrated ownership in the letting pool.

What this means is that creativity in off the plan deals is becoming increasingly important. In one convoluted matter recently, our purchaser client ended up getting a bank guarantee from a developer in exchange for paying for some developer stock. This needed to be supported by our client’s bank.

Surrounding yourselves with experience in matters of this nature is now more crucial than ever.