The popularity of serviced apartments ordinarily peaks during and after holiday periods, as travellers return to work considering investing in holiday homes that they have scouted during their time away. But one property commentator says that she has “personally seen these investments stay vacant for months, if not years.”
Anna Porter, founder of Suburbanite warns investors that more often than not, higher yields mean higher risks and this is no different for investing in serviced apartments. With the shake-up of the short-term letting industry, there is no saving grace for a dodgy holiday rental.
“Whilst you may find yourself away on school holidays and caught up by a smooth salesman in the local shopping centre with 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,” Ms Porter says.
“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 original development application, in some instances, it is simply a way for the developer to utilise the tourism zoning to push the envelope with the scale and size of the development at the discontent of local councils. Developers can lean on the tourism benefits to the local area to get the development pushed through and up andrunning,”
“Frequently, a lesser known second tier 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 companyto take over the head lease during which time, hundreds of units are leftunoccupied,” says Porter.
“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,”
“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. 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,” says Anna Porter
“My best advice is to stay well away from them in the first place, Airbnb will not saveanyone!” warns Porter.
The previously unregulated short-term letting industry in NSW has just seen some big changes and investors are being warned to watch out. Regulations to Airbnb were going to happen eventually, but the wheels have finally been set in motion.“Airbnb are going back to their grass roots in NSW,” Ms Porter says.
“Originally the platform was set up for people who wanted to rent out some sparerooms in their own home as an alternative to backpacker accommodation for travellers, thus allowing home owners to make some spare cash. The Airbnb platform has since been exploited and has become the short-term accommodation platform for investors to maximise profits. Without proper regulation and no barriers to entry this has resulted in many complaints from local communities and a need forgovernment and other regulators to step in,” Ms Porter explains.
Regulators have stepped in and the regulations are being deemed as “the toughestlaws in the world to crack down on bad behaviour” by Better Regulation Minister MattKean for good reason.
Many investors are left screaming “what about our returns” but Anna Porter of
Suburbanite has been cautioning Airbnb investors for many years on investing in a new to market concept that has always been very unregulated.
“If you’re going to invest hundreds of thousands into an industry in its infancy, youneed to have an appetite for risk and be prepared that it may not last long. Investors should have assessed their numbers based on long term rentals as well and ensured they were still able to afford their investment, without a supplementary Airbnbincome,”
“We saw so many people jump on the band wagon without really understanding the risks associated with it.” Says Ms Porter
This might only be rolling out for Sydney at the moment, but it is setting a benchmark for other locations to follow. Councils like Byron Bay have been threatening tighter regulation in this sector for a while now and are also heading down this path.
The regulations follow other countries like Japan where in recent weeks only 13,800 properties were left on the platform after an estimated 68,000 properties removed almost overnight when regulatory changes came into play. The market has seen an oversupply of property in many locations resulting in downward pressure on pricing and Airbnb hosts having to take lower fees to avoid vacancy and bigger group bookings to make up the numbers.
Anna Porter also warns on the complexity of the regulations and how they are not only Airbnb specific.
“Don’t think that this is exclusive to Airbnb, this will impact all short-termaccommodation platforms ‘like Airbnb’ but the likes of stays and bookings.com willalso come under the same scrutiny. The property market, in Airbnb hotspots will see more properties being taken from the short-term rental market and moved over to long term leases and even some investors pulling the pin altogether as a follow-oneffect from the regulation,”
“Some investors will not want to conform with the legislation and will have to put their property on the market, as many of the properties are set up as rentals only and not in an area that the owner of the property resides. Some property owners simply can’tadapt and will have only two options, a long-term lease with significantly lowerreturns, or to sell.”
The policy is set to be reviewed in 12 months’ time.
“This regulation really only starts to scratch the surface of some of the issues in theshort term letting sector. Many property owners are renting out rooms or wholehomes without consideration given to the safety of the occupants.” Says Porter.
“We see many properties that are not compliance with fire regulations, pool safety, building codes, railing heights on balcony’s, and many other safety hazards that put occupants, including families with children at risk. If you rent out a property on a long-term lease, or you are a commercial hotel venture you need to be compliant. But this sector of the DIY hotel space has continued to circumvent their obligations to other people’s safety”.
Porter predicts it won’t be long before this too comes into the spotlight, “and so it should”, she says.