The popularity of serviced apartments ordinarily peaks after holiday periods, as travellers return to work considering investing in holiday homes.
Whilst you may find yourself on summer holidays and caught up by a fancy 4D model in the local shopping centre of the next big investment disguised by promises of high returns, the structure of ownership for serviced apartments is very different to a typical property purchase as you know it.
Instead, serviced apartments must be a part of the letting pool so they cannot be rented out privately and must go into the commercial style letting pool which occurs 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, these do 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 to the discontent of local councils.
Developers can lean on the tourism benefits to the local area to get the development pushed through and up and running.
Frequently, a smaller company then opt to run the building and its functionalities but they typically fail at this type of venture which in some cases can lead to bankruptcy of the head lessor.
After the failure 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 company to take over the head lease during which time, hundreds of units are left unoccupied.
This can then result in lengthy battles with council and state governments to release the units from the letting pool which often does not happen.
It is usual that during this time, the owners cannot meet the financial commitments and the mortgagees move in and take over unit-by-unit resulting in significant declines in values.
Let’s say you did go shopping on your summer holiday, and not shopping for a cute dress or new pair of shoes, but the kind of shopping that led you right into a deal in a serviced apartment.
There really isn’t an easy way out when it goes bad. I have seen many properties foreclosed on by the lender and sold mortgagee in possession when the management company walks away, leaving the investors with the mess.
My best advice is to stay well away from them in the first place.
Say you are browsing, you need to buy a serviced apartment that has the letting pool structure in the managing agreement and NOT in the original development application.
That will mean that if the overarching managing company goes bankrupt and walks away from the agreement you can let out the property privately, or on airbnb or live in it.
However, if the letting pool structure sits in the original D.A then it is most likely that you will not be able to do anything with the unit – not even rent it out or live there – until another serviced apartment company takes over the head lease.
This can be a long process. So the first option is the only ‘safe’ way to buy these properties and avoid having a vacant investment, that could sit vacant for months or even years. Yes, I have personally seen this occur.