New units are getting better. Well, maybe some are.
New units are getting better; well, maybe some are.
If you are considering buying a new unit you now have some options that you didn’t have a year or two ago.
The appointment of the NSW Building Commissioner in 2019 has been one of the better changes our previous NSW Government made to improve the quality of high-rise residential development.
For years the axiom in real estate was ‘never buy new’ and many of us in real estate used the definition of new as ‘built in the last 10 years’. That’s typically how long it took to discover all the issues in a new building and work out if they could be resolved and by who.
Understanding the cause of a building problem is really just the start. Being able to get the problem fixed has been the real nightmare. Think Opal Towers. The problem has been in large part because of insurance and liability. Without getting into the blow-by-blow sequence of things, most people who buy a new unit assume that the builders’ insurance works like car insurance or home insurance. Something goes wrong and the insurance company steps in and takes over and gets the property fixed. If someone else should pay then that’s between the insurance company and them.
This concept is called ‘first resort’. When something goes wrong, the insurer is your first resort. Unfortunately, there is also a concept of ‘last resort’. Put simply, when everything else has been tried and failed, then the insurance will step up and pay. One of these insurances of last resort is Home Warranty Insurance which must be included in building contracts over $20,000. If something goes wrong and the builder is dead, gone into liquidation or cannot be found, then that insurance will cover you. If the builder is still around and won’t fix the problem, nor will the insurer. Your only alternative is to sue for breach of professional liability.
That means not just a lot of legal costs that you may not get fully back but years of time preparing your case, getting experts to confirm the issue and the loss of property value while the dispute remains unresolved. The biggest challenge is proving something specifically was done wrong or that something wasn’t done that should have been done. Just because the building is falling down doesn’t prove fault. Forget the idea of saying, what else could it be. That was the problem with Opal Towers. Everyone had to sue everyone else, and no one was allowed by their insurers to accept fault or blame.
And when high profile failures like this happen, it’s not just the owners of the building that suffer loss. In the case of Opal Towers, it was reported that the surrounding building also had their property values discounted by buyers. When there is doubt and fear, everyone gives it a wide berth.
So now to the changes
iCIRT rating system
iCIRT stands for the Independent Construction Industry Rating Tool. It’s a star rating system that awards up to 5 stars to builders and developers who are deemed to be more trustworthy to deliver a more reliable outcome. The more stars, the more confident the ratings agency is of the professional. They look not just at their track record but their capitalisation, business partnerships and directors, industrial disputes, payment to contractors and so on. They even look at the businesses they do business with so if a business is found to be doing work for a 0 star business, or worse having a 0 star firm doing work for them, their own rating will come down. And I thought google reviews were tough.
And the stars are coloured based as well. They get Gold stars if they have been fully cooperative and consented to all requests of the ratings agency for information. Those stars become Silver or Bronze if they were less forthcoming.
So how good is it?
Well, you might remember the name ProBuild which went into administration beginning of 2022. The ratings agency saw red flags in ProBuild’s data as early as October 2019.
We also know of stories of buyers not going ahead with a purchase from a low rated builder and instead buying in another building built by a company with a far better rating.
Right now not all companies are rated. The ratings agency will rate a company if they are asked by a building regulator or Government official or by the company themselves. That will change and more will be rated across more professions including lawyers and accountants and even Strata organisations. Now that will be fun to watch.
Banks will also be using iCIRT to inform their decisions about lending on particular building.
As of yet there isn’t any real right of appeal. If a builder disputes the rating, he can talk, give more info, plead, and cry but he can’t take them to an independent body for review.
With a higher star rating, buyers can be more confident the builder will come back to fix any issues and there will be less issues to fix. That translates to less headaches and more importantly less strata maintenance costs over the long term. And that hopefully translates to lower levies and better resale.
Providing the system remains reliably applied, it has a lot of power in changing the culture of construction. Builders and developers liquidating the company to avoid legal issues won’t be able to walk away and start a new company. The agency checks past directorships and issues with those building as well.
Is the system perfect, heck no! But it is making the truth about a builder’s quality of work a lot more transparent that has been the case in the past. And its power is already showing. I checked with an agent who sells a lot of new units off the plan and asked if it was having an effect, were buyers asking about it. He proudly told me all his builders and developers have 3 stars and they promote it to buyers. That’s the lowest rating given. The ratings agency doesn’t give 1- or 2-star ratings.
At some point, house builders will also be subject to this rating system and in time homeowners will say,
This is my new home; it was built by a builder with 4 stars.
Just what we need, a new status symbol.
To find out more go to www.buildrating.com
Decennial insurance is new.
The term Decennial comes from the fact the insurance covers a 10-year liability. This insurance has been available overseas but is now being offered in NSW principally off the back of the building reforms happening in our state.
The big difference with type of insurance is that it is a ‘first resort’ policy. If there is a building fault, the insurance immediately looks at what needs to be done and gets it organised. Resolving who is at fault and why, happens later and independent of the unit owners.
If it had been in place with Opal towers, as soon as the issue was realised, the residents would have been provided with accommodation (the insurance covers that) while the insurer appointed engineers and consultants to resolve the issue. The work would then have then been completed and the owners moved back in.
The policy is only available to builders the insurer is confident of (naturally). They generally will have an iCIRT rating and more importantly the insurer will be using their own Certifier monitoring everything from designs all the way through construction before signing off on the job. Without their signature, the policy won’t be issued at completion so it’s in everyone’s interest to get it right.
It’s the independence of that second tier of certifying that is so powerful. In the past, the only certifier employed was employed by the builder so if in doubt, it got waved through. Now, if in doubt, it has to be fixed.
Buildings without this insurance will still use the existing system of a building bond. It costs the builder 2% of the construction value and covers the building for only for 2 years. After that, the builder gets the bond back.
There are plenty of stories of builders who had reported to them issues in that 2-year period. Instead of fixing the issues properly, some builders did patch up jobs while they waited for the 2-year period to expire. After 2 years, the builder would get their bond back and the problem would reappear.
Add to that, many issues only become apparent after that 2-year period is up. Once the bond is paid out, the only way forward for a strata plan was to sue the builder’s professional indemnity insurance.
This Decennial does away with all that and runs for 10 years. To be clear, the value to a buyer of a unit in a building that has this insurance is the hope and expectation that a strata plan will ever need to call on it. Most insurance doesn’t make things safer. It just reduces the financial risk if it happens. We expect this policy will reduce the chances of things going wrong. That is far better than any amount of getting something fixed.
In time I expect we will see the value of these unit blocks that have this insurance rising above those that do not have it. And that value difference is likely to last a lot longer than 10 years.
The previous NSW Government commissioned a report to look at the feasibility of making Decennial Insurance mandatory for all high-rise residential construction in NSW. That’s how it is in some other countries. We will just have to wait and see if the new Government continues with the same speed of building reform we have been enjoying.