Growth tipped for CBD apartments, but investors warned to tread carefully

Growth tipped for CBD apartments, but investors warned to tread carefully
Growth tipped for CBD apartments, but investors warned to tread carefully

Investing in a serviced apartment in a major CBD location is a way for residential investors to get a foothold in a hybrid commercial asset.

The most recent tourist accommodation figures put out by the ABS paint a picture of strongly performing serviced apartment markets in the major centres, while those in regional areas appear to struggle.

In Sydney, Melbourne, Brisbane and Perth occupancy rates are all above 80 – higher than their respective state occupancy rates and well above the national average of 66%.

A growing number of serviced apartment guests are spending more money per room per night in CBD apartments than they were a year ago.

This current rise comes on top of extraordinary growth in the sector’s market share over the past decade, with serviced apartments now accounting for 25% of all room nights sold throughout Australia each year, according to research by CBRE.

Demand from the corporate market has fostered more recent development in urban areas.

The CBRE Hotels Traveller Accommodation Development Database shows serviced apartments now represent, on average, just under 70% of all new traveller accommodation to enter the market over the past decade.

Market growth is set to continue with serviced apartments representing 75% of new projects currently planned or under construction.

CBRE Hotels Queensland associate director Paul Nyholt says the growing popularity of the sector has attracted considerable interest from developers – particularly given the current funding constraints in regard to traditional hotel product.

“At a time when it is difficult – if not impossible – to economically support the construction of a new build hotel in one line, serviced apartments are bridging the feasibility divide,” Nyholt says.

Headwinds

Despite the popularity of serviced apartments with business travellers and leisure seekers, investing in the sector presents its challenges.

While serviced apartments represent a relatively cheap investment opportunity – one-bedroom apartments can be bought with spare change from $200,000; two-beds for under $300,000, according to CBRE analysis of the sector – serviced apartments have the potential to underperform, can involve potentially complex strata agreements and are subject to the fluctuations of tourist demand.

“Investors need to understand that they are purchasing an investment that relies on the dynamics of the traveller accommodation market and the ability of that market, the operator and the structure of the offering to support the purchase decision,” says CBRE Hotels regional director Ken Smith

“To counter the poor investment performance of many past projects and to support the sustainability of the sector, future developments will need to be economically supportable not just successfully marketed,” he says.

Serviced apartments must also compete with hotels for clientele.

According to Smith, they can be at a disadvantage due to limited marketing and poorer brand recognition compared to the internationally branded hotels.

Many international markets, he says, are unaware of the serviced apartment product.

Furthermore, while there are relatively clear classifications of hotels to aid consumer choice, Smith says a “lack of consistency and clarity in the categorisation of serviced apartments leads to inconsistently-rated properties and subsequently consumer confusion”.

Searches by Property Observer of cheaper serviced apartments for sale uncovers many that appear to be in shabbier, older-looking buildings, suggesting the potential for higher maintenance and upkeep costs.

Future outlook

The most comprehensive survey of the serviced apartment market to date has been carried out by IBIS World.

It forecasts growth for the sector of 1.7% from 2011 to 2016 compared with 3.7% over the previous five years.

Investment in the sector is set to remain strong due to increasing market demand and preferences for serviced apartments as they offer more space and facilities for guests over hotel and motel accommodation.

Guaranteed investor returns on apartment purchases are estimated at 7.5% in 2010-11, according to IBIS World.

The researcher says that while rental fees and utility costs are high and increasing due to increased land costs in recent years, and utility fees are rising, the cost structure of a serviced apartment is not expected to change significantly over the next five years.

Investors, though, should be aware of a number of challenges facing the sector.

“The serviced apartments industry is sensitive to factors that affect domestic travel patterns and the level of international visitors arriving in Australia, such as real household disposable income changes and travel availability time. Another factor is the dollar,” the IBIS World report says.

IBIS World identifies business travellers as key market for serviced apartments – a travel demographic affected by economic conditions, business sentiment, business profit growth and use of communications technology as substitutes for travel.

Like CBRE, the IBIS World report also highlights competition from the hotel sector and says serviced apartments are sensitive to the supply of total accommodation rooms including hotels rooms, which can affect room tariffs in both sectors.

Other global and economic factors including GDP growth in East Asia, the US and Europe and the prevailing consumer sentiment can have significant impacts on the returns generated for investors.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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