More often than not, higher yields scream higher risk. This is no different for investing in serviced apartments.
By definition, a serviced apartment is a fully serviced apartment that is available for stays both long and short term which provides hotel-like amenities such as room service, fitness centres, laundries and recreation rooms.
A builder/developer builds these to then be sold off individually as units. The structure of the ownership of these is very different to a typical property purchase.
Serviced apartments must be a part of the letting pool. They cannot be rented out privately as they must go into the commercial style letting pool.
This either happens through the overarching lease or through the DA.
With the overarching lease, this means there is for example a ten-year lease to a company such as QUEST or ADINA. They provide a higher yield, but if you wish to stay there you must book through their services.
More commonly, it is in the DA. In some instances, it is simply a way for the developer to utilise the tourism zoning, but in many instances that we have seen a developer will be pushing the envelope of the FSR’s and bulk of the development and lean on the tourism benefits to the local area to get the development pushed through, commonly to the discontent of council.
Perhaps a smaller company then opt to run the building. It is not uncommon for the smaller operators to fail at these types of ventures, and in some cases, can lead to bankruptcy of the head lessor. Once this has occurred the unit owners must still abide by the letting pool conditions and not rent the units privately or move in despite the units being unoccupied. It’s then a waiting game for a larger or another company to take over the head lease during which time, hundreds of units are left unoccupied.
This can then result in lengthy battles to with council and state government to release the units from the letting pool which often does not happen. During which time, if the owners can’t meet the financial commitments the mortgagees move in and take over unit by unit. Resulting in significant declines in values.
Learn more by watching the below video where Anna Porter delves into this type of investment.
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