The insurance product giving Australian property buyers surety
Property is a key pathway to wealth. A new product ensures you get what you paid for.
4 min
Following significant building industry reforms in NSW in recent years, the insurance industry has entered the apartment sector, offering insurance on quality building projects, for quality trustworthy producers. As the NSW Government under the administration of the Office of NSW Building Commissioner leads building regulatory change, the need for commercial solutions supporting consumers and those trusted building practitioners could not be timelier. Enter Latent Defects Insurance (LDI). Here’s what you need to know about this game changing product.
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What is Latent Defects Insurance?
Latent Defects Insurance (LDI)is an insurance product available around the world for decades but only now available in Australia. It provides insurance protection for structural defects and waterproofing defects in apartment buildings for a period of 10 years after completion of construction. This is a protection unavailable to consumers or industry previously, and it provides unequalled consumer confidence in the quality of building for purchasers while eliminating the destructive and growing litigation business model operating across the construction industry.
Why would an insurer offer this cover given the stories of poor building?
LDI changes the way building insurance is offered. Rather than reliance on history and in house certification, LDI requires a developer and builder to employ an independent inspection service all the way through construction. This inspection service must be approved by the insurer and the scope of inspections agreed before construction commences. The inspection program is detailed and includes design review, construction inspection, waterproofing inspection and testing among many aspects of assurance. This gives the insurer, the construction participants, and consumers much greater surety of compliance with standards and codes, safety, and delivery, enabling an insurance security to be offered after completion of the building project.
Won’t this insurance only add to the already strained affordability pressures?
No. In NSW, a developer is required to provide a 2 percent financial bond to NSW Fair Trading at completion securing the quality of building for a period of two years. This cost, the 2 percent bond is charged to the construction cost and therefore onto the purchaser of units. If that bond is returned to the developer at the end of two years, it is rarely if ever passed back to those purchasers. LDI is an alternative to the Strata Bond, meaning that the developer has a choice of providing the two-year bond or a 10-year insurance policy. The current experience for the cost of the LDI product is it is priced at approximately 1.5 percent. This means LDI is in fact cheaper than the current bond and reduces the impost on purchasers.
How does this benefit consumers and the building industry?
Latent Defects is a 10-year insurance cover with cover at the building value or $50 million. The strata bond is a two-year protection valued at 2 percent of the cost of building. The limitations on the value and time offered by the strata bond are and have been catastrophic for many consumers. It also brings about significant litigation risk for developers, builders, and financiers. Latent Defects Insurance is offered on a strict liability basis. That means there is no need to find fault to enable a claim, eradicating the litigation business model that costs all participants tens and often hundreds of thousands of dollars and many years of time and frustration.
Why would a developer not elect to purchase Latent Defects Insurance?
The product is only new to Australia, being offered in the open market in the past 12-months. Resilience Insurance is the first to offer this product. The insurance is offered selectively to developers and builders with quality building histories meaning those with a history of association to consumer harms or poor quality outputs will either not be able to obtain the cover. Other developers have relied on the return of the 2 percent bond in their own profitability models, taking that benefit to their business returns over tangible, transparent delivery and security in favour of their clients.
How do you ensure your property is protected by Latent Defects Insurance
Prospective purchasers should be asking their developer in the sales display suite if their property will have Latent Defects Insurance. There is already strong evidence and media reporting of consumers moving purchase decisions on this exact point. Ask your developer and their agents if you are getting a property with two years limited protection or 10 years full insurance protection. For developers, the security provided means that the risk of litigation is eliminated.
CEO of Resilience Insurance, Corey Nugent says:
Latent Defects Insurance is a vital protection for consumers and building practitioners changing the way building outputs are overseen and delivered. Ensuring quality and backing that product with full insurance protection enables apartment buyers to have confidence in their investment, without the fear of catastrophic future exposures.
Supporting the significant and necessary regulatory reform in NSW, Resilience Insurance has been able to offer this product benefiting confidence, transparency and trust in quality building product. Providing insurance protection for the benefit of apartment owners, removing the litigation risk for building industry participants and ensuring our apartment buildings are delivered to a quality benchmark are just some of the benefits of Latent Defects Insurance.
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2 min
A McDonald’s restaurant in Yass has been brought to market with one of the last remaining pure turnover leases in Australia, offering investors a direct share of revenue rather than a traditional fixed rental return.
The asset, located at 1713 Yass Valley Way, is being marketed by JLL via an expressions of interest campaign closing on 30 April. It is underpinned by a legacy lease structure no longer offered by McDonald’s in Australia.
Under the arrangement, the landlord receives 6.5 cents for every dollar spent at the restaurant, creating uncapped income growth linked directly to sales performance.
The lease is structured as triple net, meaning no operational risk, capital expenditure obligations or management responsibilities for the owner.
According to JLL, the property has recorded compounded annual sales growth of 4.26 per cent since 2003, with rental income rising by 150 per cent over the same period.
JLL’s David Mahood said the structure allows investors to “participate directly in the sales growth” of the business, rather than relying on fixed annual rent reviews.
The newly commenced lease runs to 2036, with four additional 10-year options extending to 2076, providing a weighted average lease expiry of 9.92 years by income.
The asset sits on a 3,571 square metre freehold site in Yass, with significant frontage to the Hume Highway, one of Australia’s busiest freight corridors.
The location benefits from high volumes of passing traffic, including an estimated 75,000 vehicles per day.
The quick service restaurant sector has remained resilient through economic cycles, including the pandemic and recent cost-of-living pressures, with McDonald’s continuing to expand its footprint and invest in store upgrades across Australia.
JLL pointed to strong investor demand for McDonald’s-backed assets, with recent transactions typically yielding between the high 2 per cent to mid 3 per cent range.
The Yass listing is expected to attract interest due to the scarcity of turnover-based leases, which provide a natural hedge against inflation by linking income growth to consumer spending rather than predetermined increases.
McDonald’s Yass is available for sale via an Expressions of Interest campaign closing at 3:00pm (AEST) on Thursday, April 30.
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