[+] Defects Insurance Sparks Off-the-Plan Race to the Top

Highrise developments in New South Wales and beyond have been plagued with construction issues—and the reputational fallout for off-the-plan is almost unquantifiable. A way to mitigate this, according to Haitchin Group, is to invest in latent defects insurance (LDI), also called decennial liability insurance, which is effectively a post-building-completion 10-year warranty. Haitchin implemented LDI for its Infinity Park mixed-use masterplan project in Sydney’s rapidly expanding Norwest. NSW Building Commissioner David Chandler said at the time of LDI ’ s introduction into the state late last year that ultimately it would improve the design and construction of apartment buildings in that state. “We’re looking to clean up the market and bring an end to expensive litigations against developers who have deep pockets or subsequently vanish into thin air,” he said. ▲ Urban Property introduced LDI at its 67-unit The Parq at Bexley. Haitchin Group is among the first to take it up. “The building commissioner’s aim is, in part, to improve the reputation of the sector. There have been some dodgy builders and developers not delivering what was needed in accordance with Australian standards and building codes,” Haitchin general manager Robert Tasevski says. “We looked at a few different options but in Europe this is standard, they’ve been doing it for 70 years and we should be doing it here.” Reputational damage According to PRD Real Estate data, there are 802 new off-the-plan projects due to begin in 2023-2024 in the Greater Sydney area. Of those, 13.7 per cent (110) have already begun construction while 63 projects have bee abandoned. However, well-publicised building defects such as the $170-million Opal Tower by Ecove Group , have made buyers cautious about off-the-plan development, Tasevski says. “If you look at Opal and Mascot towers and the issues there, it was the end user that suffered the most. As a result of that, there was a lot of negativity around buying off-the-plan,” Tasevski says. Taking on LDI means that buildings, before completion, undergo an extensive audit by the insurance company that is taking on the risk. ▲ Infinity Park will comprise 290 apartments across three residential buildings and a 25-storey tower. “We went through a very rigorous process to get approval from the insurer but it basically says that Haitchin Group has the credentials to deliver this project from a design and project perspective.” An independent quality inspection organisation was engaged for monthly building audits, throughout the project building lifecycle, and they also examined the plans and specifications. “They would spend anywhere between four and six hours onsite,” Tasevski says. But there are reasons not all developers have taken up LDI despite its obvious benefits. The challenges of LDI Alex Hartmann, a partner at Sydney law firm Baker &amp; McKenzie, says that while clients have been looking into LDI, many have declined. “This is primarily based on cost,” he says. “But slow uptake is also due to a lack of familiarity—it’s a new product that is familiar in the civil law jurisdictions of Europe but not in jurisdictions with a common law tradition. “There is also a lack of competition—to my knowledge there is only one provider so far.” This provider is Resilience Insurance, which introduced the product folllowing the acceptance by the NSW Department of Customer Service and Minister for Fair Trading Victor Dominello of its application to offer decennial liability insurance as a form of security under the Strata Building Bond and Inspections Scheme in October, 2023. ▲ Haitchin’s Maitland Place Infinity Park project comprises Turner-designed homes in a resort-style precinct. “You have to pay the premium up front and it wasn’t a cheap exercise but the value for us is proving our longevity,” Tasevski says. “A lot of our purchasers are repeat customers and if we want to have repeat customers, we want to provide them with assurance that it will be built, it will be built well and it will be built to last.” Tasevski says it cost Haitchin $10 million up front to set up LDI. “The end-user can bear the brunt in taxes, interest rates and whatever else goes up and often it all gets passed on,” Tasevski says. “But price points are critical these days. If you pass that $10 million on, then you will price yourself out of the market.” ▲ KDMC’s Ophora comprising 81 apartments at Blacktown also has LDI. LDI has also been proposed as an alternative to the NSW Strata Building Bonds, which aim to secure funds to be used to rectify defects on new apartment buildings, and are usually calculated at 2 per cent of the construction costs. They are held for two years post completion, compared to the 10 years of LDI. According to Baker &amp; McKenzie, costs associated with LDI generally range from 1.3 per cent to 1.6 per cent of the construction contract price. Given that strata bonds only exist in NSW, this is an added benefit for buyers, but also a cost for developers, outside the state. Impact on the market Security is key for off-the-plan buyers, Tasevski says. “In the past several months, a number of high-profile, good-quality builders have gone into liquidation or administration. If there is LDI in place, if something happens to builder or developer, you know you have a warranty.” ▲ In NSW, the first state to legislate for LDI, developers of multi-storey apartment buildings can obtain LDI in lieu of the current strata bond scheme. While builders might initially be put off by LDI, it shows commitment and confidence in building work, Tasevski says. “Our development lifecycle doesn’t stop when the builder completes project and the apartments are bought,” Tasevski says. “We want to make sure people have something they can rely on and is trustworthy.” Hartmann says there is safety for buyers in the currently difficult environment for builders. “If implemented, it may reduce the levels of defects and disputes if problems are caught early as part of the insurer due diligence required by this product,” Hartmann says. “[It will also] help separate the reputable builders and developers who can obtain this cover, and enjoy a quality premium and quicker sales, from those who cannot.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Defects Insurance Sparks Off-the-Plan Race to the Top

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