What are the pros and cons of buying a serviced apartment in Sydney?
And what should buyers bear in mind before they sign a contract to purchase one?
What are serviced apartments?
The main factor that determines whether an apartment is classed as a “serviced apartment” is local council zoning. Typically, a building is approved for serviced apartments before it is constructed, at the Development Application (DA) stage.
Serviced apartments are normal self-contained apartments that are available for short-term stays or leases of up to 3 months.
Some serviced apartments are fully furnished, often right down to the contents of the kitchen cupboard. These apartments can include management of other services or amenities like reception or access to a communal pool or gym within the building.
Are there different types of serviced apartments?
There are two main types of serviced apartments available to purchase:
1. Serviced apartments that are leased, managed and run by a serviced apartment operator
Serviced apartments can be strata-titled units in a hotel-style building, and they are typically run by the brand name hotel chain or a preferred managing group that has signed an agreement with the building. The building may be run like a hotel, with amenities and services comparable to hotel accommodation, and you can buy a hotel room or a whole apartment (usually on a long lease). The hotel chain or managing group will be the “tenant” and will in turn sign a long-term lease with the apartment owner, that includes regular rental increases, but also restrictions on how the property can be used. They typically guarantee a rental return to owners and rent it out to individuals as accommodation.
2. Unmanaged serviced apartments
In some buildings, it is possible to buy serviced apartments that are not currently under a management agreement. In this case, you have a choice over who manages it, how you run it, and who you rent it to. However, because it’s classed as a serviced apartment, you are still obligated to have short term leases, and you can’t live in it as your main residence.
At Metro Realty, we sell and manage many serviced apartments in buildings like Regis Towers and Aspect, which offer more flexible serviced apartments.
If I buy one, can I choose who manages my serviced apartment?
If you buy a serviced apartment without a management agreement in place then, like any other investment property, you can choose who manages and runs it for you.
Most owners choose to appoint a property manager who can take care of leasing and running the property. It’s wise to choose an experienced property manager who is familiar with managing serviced apartments.
Who buys or rents serviced apartments?
Depending on the particular property, serviced apartments can be bought outright, like a normal apartment, or purchased on a long term lease (for example, a 5-10 year extendable lease).
Serviced apartments run by hotel-style chains are often initially very attractive to investors seeking a guaranteed rental return. These organisations sign the lease with the owner, then, in turn, manage them and lease them to renters. However, they come with restrictions and limitations.
Many investors plan to run apartments in serviced apartment buildings as Airbnb style short term accommodation.
Serviced apartments are popular with a range of renters seeking short and long term accommodation. From tourists on holiday to business travellers, they may also appeal to renters seeking a furnished apartment while they renovate, visit relatives, or relocate to a different city.
How has COVID-19 impacted serviced apartments?
COVID-19 has affected all aspects of our lives, including tourism. Given that tourism (for leisure or business) is a huge driver of the serviced apartment market, it’s fair to expect some fallout while Australia’s borders are closed. That said, many operators are receiving a steady flow of local tourists, and some serviced apartments have been in constant demand from hotel quarantine.
We expect any impact from COVID-19 to be short-term. Many experts predict big growth over the medium to long term in the Australian serviced apartment market, which is already worth an estimated $3 billion.
What you need to know about buying a serviced apartment
- Because they are short term rentals, serviced apartments can offer excellent, higher than normal rental returns, providing instant cash flow and great yields.
- Serviced apartments may have lower vacancy rates if you sign an agreement with the serviced apartment operator because they have to pay rent no matter whether they have a tenant staying or not.
- If you purchase a dedicated serviced apartment in a chain-run building, your market may be restricted to investors when it comes time to sell. Serviced apartments in a more flexible building, not under management, have a wider market.
- There may be restrictions on how you can use the property, which are typically built into the purchase agreement. For example, you cannot live in the property long term, as your primary place of residence, but you may be able to take a holiday there.
- While strata-titled serviced apartment holiday accommodation can be purchased for a cheaper price than a typical standalone apartment, the flipside is that it can be harder for investors to obtain finance, and a larger deposit may be required.
- If you have purchased a fully furnished apartment, and are managing the property yourself, as a landlord you have to bear in mind the additional costs of maintaining the contents of the apartment.
- Serviced apartments may not appreciate in value as fast as other properties, typically because they can’t be lived in by the owner, and it’s harder to get a loan to buy one.
What to look for before you buy a serviced apartment
Choose a serviced apartment in a popular, central location that holds appeal for short term rentals. Examples include Haymarket, the Sydney CBD, or similar, with good transport, services, major tourist attractions, work hubs and amenities nearby.
Like any investment, you should choose a serviced apartment after doing your due diligence. Ask to see strata reports, information on rental income and any running costs or expenses.
A serviced apartment can be a great investment but beyond the rental income, you also need to think ahead and consider ease of resale, capital growth, and your overall goals.
If you’re looking for flexibility, want to choose who manages the apartment, or want to stay in the apartment occasionally yourself then you’ll need to choose an apartment in a building like Regis Towers or Aspect.
If you’d like to know more about buying a serviced apartment or are thinking of leasing or selling a serviced apartments in Sydney, contact our expert team today.