In recent months, building insurance in Wellington has become a hot topic in the media. Most of the debate so far has been around insurance for individual homes – but the latest rumblings in the market suggest apartment insurance could be the next wave to come crashing down on the Wellington property market.
First, let me provide a quick apartment insurance 101. Apartment insurance is managed collectively by the body corporate, rather than by apartment owners themselves. That’s because, as there are a number of apartments within the building, it’s likely that insurance related events – such as flooding or fire – could impact more than just one apartment. There could also be structural issues that may affect the fabric of the entire building, and then there are shared areas, like car parks and storage areas, which require insurance protection as well. So, the body corporate is responsible for building insurance and the costs are included in the strata fees paid by each apartment owner.
A perfect storm
Recently, apartment owners have been experiencing a dramatic hike in building insurance premiums – and all indications are that they will continue to rise. That’s because there is increasing focus on granular risk in Wellington, which is linked to risk factors around the Earthquake Prone Building status (the percentage of current building code standards that a property is currently built to). These factors combine to provide a perfect storm of angst for apartment owners and their lenders. Let's look at that issue first.
Research by the Inner City Wellington group on16 buildings suggests the average total cost of strengthening per apartment was around $437,000 against an average capital value of $480,000. Many owners claim they have no way of raising funds for that work, and risk fines of up to $200,000 for non-compliance. While the government has announced a $10m loan scheme in the recent budget, many apartment owners say they can’t afford to repay the loan and will never recoup the costs. Added to that, there’s complexity if the body corporate votes to proceed with works while some apartment owners can’t afford to contribute.
Inner City Wellington says that it is aware of at least two buildings where the body corporate has dropped insurance altogether and I’m aware of one older block that has no earthquake cover. As well as exposing apartment owners to significant financial risk, these apartment owners are now exposed to being in breach of their mortgage conditions (if they have one). In addition, potential buyers would be unable to get a mortgage assuming the vendor or body corporate declared the lack of insurance in the Pre-Contract Disclosure Statement. According to the Unit Titles Act, sharing the details of insurance cover is only mandatory on the Additional Disclosure Statement, which must be requested by a potential purchaser. The body corporate can charge to provide this information.
This state of affairs also makes me wonder how a body corporate could decide to drop insurance when so many of its members are likely to have a clear interest in maintaining cover. If this is true, it’s a serious concern. So, what does this mean for the apartment market in Wellington?
For existing apartment owners, costs will continue to climb and they may have some difficult decisions to make. If there really are apartment blocks not renewing insurance, then those apartments could technically become unsaleable to those seeking a mortgage. As they are only purchasable by cash investors, it would cause a significant drop in value.
So, what steps should potential buyers take to avoid falling into an insurance trap? First, they should double-check the building insurance cover held by the body corporate (which may require paying for the Additional Disclosure Statement) and try to understand the possible effect on body corporate fees in future as premiums continue to rise. Then, make any offer subject to confirmation of satisfactory insurance (as a recent home buyer myself, it seems that real estate agents are actually adding such a clause by default, which should be applauded).
Although we haven't seen any impact on the performance of the apartment market at the moment according to CoreLogic’s latest research, it’s entirely possible that it's happening at a small scale, and something we’ll keep an eye on.
With increasing petrol costs, Inner city apartment living has never been so attractive, but with the potential risks involved, caveat emptor –buyer beware – has never been so relevant.