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European model reducing the cost of Australian housing

A European housing model looks set to reduce the cost of buying into the multi-residential Australian property market, but should it gain traction, real estate agents may come out the losers.

Baugruppen is a housing model first established in Germany that sees like-minded home buyers come together to design and build multi-residential housing. Rather than buying off the plan, they buy land as a group and then commission designers and builders to construct projects to their specifications.

The Conversation explains the name roughly translates to “building group” and “stands for a long tradition of self-initiated, community-oriented living and the shared responsibility of building”.

In Europe, the concept has taken off with ANZ Bank’s online magazine noting at its peak, it represented 20 per cent of the development market. Now it has also reached Australian shores.

The Baugruppen model allows apartment or strata-title residents the opportunity to cut significant costs in the building process, shaving up to 30 per cent off the price of creating housing.

Costs are reduced through lower risk and therefore lower borrowing costs and by cutting out the middle man like developers and agents.

Buyers also receive tax benefits similar to house and land packages, and the model mitigates the settlement risk that banks often incur when it comes to funding off-the-plan apartment builds.

ANZ explains: “Settlement risk is when off-the-plan apartment buyers, usually investors, change their minds at the last minute. This is generally because the value of the property upon completion of construction is lower than expected”.

“Instead of paying for their apartment, they walk away.”

In total, around three per cent of apartment buyers change their mind, but in cities where there is an apartment glut, it can be as high as five per cent.

ANZ cites the Nightingale project in Melbourne as one example of the Baugruppen Model at work.

They note in a typical multi-residential development, “banks stump up 70 per cent of funding and investors provide the rest at high-interest rates. In many cases 30 per cent interest is not unusual”.

“For the first two Nightingale projects the group secured bank funding at the usual rates but found socially-conscious investors prepared to lend for lower interest rates of 15 per cent.

“Baugruppen aims to replace some or all of the investor funds with money from the buyer’s group, cutting down the overall cost of funding.”

The Baugruppen model also mitigates the risk of having buyers walk away by having them emotionally involved in the project from the start. The model then works to actively discourage profit making and speculation, with many projects having penalties if occupants choose to sell.

For example, the group may implement a covenant or a limit on profit percentage that increases for every year the property is held.

Meanwhile, the Conversation explains there’s no one single model when it comes to Baugruppen “…every project differs in its financing, social make-up, the wishes and desires of the group, and the project’s resulting architectural and urban qualities.”

But not all are enthusiastic about the model, with ANZ reflecting some stand to lose: “The only real losers are the tax department, developers and real estate agents who get nothing from it and stand to lose more if the model succeeds in reducing housing prices.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

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