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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Competition to buy the world’s most exclusive stores is intense despite modest rent growth. Even Blackstone is ogling the market.
3 min
Don’t expect any fashion bargains on Rodeo Drive in Beverly Hills, or New York’s Fifth Avenue. And property on these famous luxury shopping streets looks as overpriced as the clothes.
While the average commercial building is worth 20% less than in 2022, the world’s most exclusive shops have barely been touched by the highest U.S. and European interest rates in two decades.
Cartier’s Swiss owner, Compagnie Financière Richemont , recently bought a property on London’s Bond Street at a rock-bottom 2.2% rent yield. Similar to the way bonds work, the lower the rent yield, the richer the price paid. The Bank of England’s base rate is around double this level. Most investors these days wouldn’t buy real estate that generates less income than the cost of debt that might be used to purchase it.
Last month, Blackstone sold a luxury store on Milan’s Via Montenapoleone to Gucci owner Kering for a similarly eye-catching price. The building was part of a portfolio of 14 properties that Blackstone bought in 2021 for 1.1 billion euros, equivalent to roughly $1.2 billion. Kering coughed up €1.3 billion, or about $1.4 billion, for the Via Montenapoleone building alone, equivalent to a 2.5% rent yield.
The private-equity firm is understandably eager to do more deals like this, and has since bought another luxury store in London. It is a surprising focus for Blackstone, which for years steered clear of retail property.
Luxury rents are resilient, but they aren’t rising fast enough to justify such hefty price tags for the buildings. Last year, rents increased 3% on Rodeo Drive and were flat on Upper Fifth Avenue, according to data from Cushman & Wakefield .
What luxury retail properties do offer is scarcity. London’s Bond Street has 150 individual buildings, according to real-estate consulting firm CBRE . But because luxury brands are fussy about where they will open a flagship store, only around two-thirds of the street is considered posh enough, limiting their options.
Supply is even tighter on New York’s Fifth Avenue, where just four or five blocks of the six-mile avenue are ritzy enough to lure the world’s most expensive brands. The luxury shopping district of Rodeo Drive in Los Angeles has fewer than 50 individual buildings.
This creates intense competition for both space and ownership. The world’s biggest luxury company, LVMH , has more than 70 brands that need a foothold on prominent shopping streets. Increasingly, LVMH’s answer is to buy the best locations. The Paris-listed company owns at least six properties on Rodeo Drive and six on London’s Bond Street.
Luxury brands see their flagship stores as marketing tools. Counterintuitively, e-commerce has made its physical locations more important. Labels including Christian Dior have opened restaurants and mini museums in their boutiques to give shoppers an experience they can’t find online.
When they are investing this much money in refurbishments, it makes more sense to own than to rent . Luxury brands have spent more than $9 billion buying boutiques since the start of 2023, according to a Bernstein analysis, and they control increasingly larger tracts of major shopping districts. Back in 2009, brands owned 15% of the buildings on London’s Bond Street, says Phil Cann, an executive director at CBRE. Today, their share has jumped to 30%.
Luxury labels also need to avoid being kicked out of a property by a rival-turned-landlord, which is happening more often. British handbag maker Asprey was given its marching orders by Hermès on London’s Bond Street. The French brand bought the building that Asprey occupied since the 1840s and wants to convert it into an Hermès flagship. Rolex recently bought a store that is rented out to Patek Philippe, although its competitor doesn’t need to move out any time soon as there are still several years left on the lease.
Most luxury stores are still in the hands of sovereign-wealth funds or rich families who might have owned the buildings for decades. Given the enticing prices that brands are willing to pay despite high interest rates, more are considering cashing out.
Landlords from Hong Kong, who began parking their cash in luxury stores around 2010, are among those selling up. New York real-estate investor Wharton Properties also sold two Fifth Avenue buildings to Kering and Prada this year at very high prices that were equivalent to 2% rent yields. Wharton is experiencing some distress in other parts of its portfolio, so it might have needed to raise funds.
Luxury brands made huge amounts of money during the pandemic. Richemont currently has more than €7 billion of net cash sitting on its balance sheet. Merger and acquisition activity has been quiet, so real estate might be the next-best thing to pour their riches into.
Property deals on the world’s most expensive streets will continue to operate in their own twilight zone, no matter what central bankers do next.
Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
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