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Should you buy that serviced apartment or hotel room you were staying in over the holidays?

January 23, 2018

The hotel and serviced apartment industry is growing, but does that mean you should invest in strata rooms? Photo: Supplied

To many, investing in a hotel room or serviced apartment that they were staying in over Christmas seems like a perfect extension of the summer holiday.

With prices starting as low as $200,0000, guaranteed yields and professional management, it’s easy to understand why strata-titled units in hotels or serviced apartments are seen by some investors as a stress-free and affordable way to step into the commercial property market.

A report from Ibisworld found that surging domestic, inbound and business tourism was one of the driving factors behind an annual revenue growth of 5.9 per cent in the $3-billion serviced-apartment industry between 2012 and 2017 – although that rate is projected to slow to 2.9 per cent this year thanks to the rise of Airbnb.

Prices for these strata-titled accommodation properties can start from $200,000, depending on the location. Photo: Fairfax Media Prices for these strata-titled accommodation properties can start from $200,000, depending on the location. Photo: Fairfax Media

Meanwhile, the hotel and resort industry is expected to reach revenue growth of 10.3 per cent by 2021 to $8.6 billion, according to a 2017 Bankwest report.

Graham Cooke, insights manager at finder.com.au, said the cheaper entry price and potential extra income are some benefits to investing in hotel rooms and serviced apartments over conventional properties.

“If you’re already looking to buy a regular apartment or a house for $1 million to $1.5 million, you can often find units available for $300,000 to $400,000 so they’re a lot cheaper to get in,” he said.

“You can often have an agreement where you’ll receive income from other aspects of the hotel as well as the rooms, for example the leisure centre.”

The guaranteed rental income over a certain period can also provide investors with peace of mind but Mr Cooke said it was important to keep an eye on when that expires.

“If you’re buying all these properties and the rental yields are only going for five or 10 years, the value could depreciate as it gets closer to the end of that guarantee period and you could be stuck at the end of it.”

Unlike public infrastructure, beaches and restaurants don't translate to capital growth. Photo: Daniel Munoz/Fairfax Media Unlike public infrastructure, beaches and restaurants don’t translate to capital growth. Photo: Daniel Munoz/Fairfax Media

But the biggest drawback to this type of investment was that the asset could only be sold to other investors, Mr Cooke said.

“The people who most heavily drive capital gains in the property industry are owner-occupiers and they’re excluded from this market; that really significantly reduces the possible increase in value of the asset over time.”

Michael Yardney, who heads up Metropole Property Strategists, said that the restriction on buyers also meant it was harder to secure finance from lenders, which cuts the buyer market further.

“The banks consider these to be a niche type of property and since they don’t see them as great investments, they usually require investors to fork out a deposit of around 40 per cent, meaning investors need to contribute a larger deposit and don’t get as large a benefit from leverage.”

Anna Porter, founder of property investment advisory group Suburbanite, said cheap didn’t always mean good and called strata-titled holiday accommodation “one of the most risky investments you can touch”.

“Often you’ll find tourism-style accommodation, serviced apartments and the like, are often in areas that aren’t as strong in employment (and) economic drivers, often lacking major infrastructure,” she said.

“They might have nice restaurants and beaches, but we’re not talking huge government and institutional infrastructure (which) affects capital growth big time.”

There are usually restrictions on how you can use the strata unit written into the original development application, Ms Porter said, which bars you from moving into the property or renting it out privately. This means it can only be let out through a major commercial lease to the accommodation providers that operate at that level.

“If the overarching management company goes bust, how hard is it going to be to get another management company to come in and take over that long-term lease?

“So you could be sitting there with a vacant property, and I’ve seen it happen time and time again, when it’s vacant two, three or four years. People need to pay a mortgage on these.”

But Ms Porter said that if investors made sure the letting pool regulations were attached to the lease agreement as opposed to the development approval, this risk could be averted.

“If it’s in the lease agreement, let’s say the lease falls over for some reason, you can revert back to letting it out privately or living in it (because) it’s not part of the original development application, it’s just what was agreed to by the whole block.”

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