Investing in Serviced Accommodation | Getting Started in SA Investing
Investing in Serviced Accommodation
Investing in real estate is, typically, one of the best investments you can make and just as a serviced apartment offers its residents something extra, it can offer the investor something extra too. While it can offer better returns than most real estate investment, it can also be more hands-off, making it great for the investor who is looking for a return that doesn’t require a significant investment of time. It is not the investment for everyone, but if it’s right for you, it could be one of the best investments you make.
What is serviced accommodation?
Serviced accommodation, often called serviced apartments, fits a particular niche in the wider real estate market. There is no precise definition, but they will generally be fully furnished, self-contained, and have some degree of regular and routine servicing.
Exactly how this looks will vary, some might appear little more than a large hotel room with a lounge area and kitchenette, while others might offer more spacious quarters with sumptuous living areas and fully fitted kitchen and dining areas. And the servicing can range from a weekly clean to a daily visit to make beds and replace consumables.
These features, however, make them attractive to a range of users. Businesses retain many serviced apartments to house staff who are working away on assignments. Others can be popular with tourists who are looking for a home away from home and prefer the independence of an apartment over a hotel.
Why is serviced accommodation a good investment?
A range of factors make serviced accommodation a good investment, especially at the moment. One of the first is that demand in the market is increasing. It is a relatively new, and still underserved, sector within real estate. This means that many of the investment opportunities are in new developments that, because they are still being constructed, can be purchased at a discount to the market value.
Serviced accommodation also offers a good yield, something which buying at a discount can further improve. The typical return on real estate for residential renting is somewhere between three and four per cent. It is possible to more than double this return with serviced accommodation, with a yield of between six and nine per cent.
The continuing rise in demand also reduces some resale risk. While, like any real estate investment, it is best seen as a long-term investment, there’s a good chance that you can at least recoup your investment at resale, and possibly make some profit, if you need to sell.
However, it is as a rental asset that serviced accommodation works best as an investment. Again, the demand for serviced accommodation helps the investor.
High demand means that the risk of voids, the peril of any real estate investment, is minimized. The broad demand also helps. Serviced accommodation is sought for both short- and long-term stays. So, while a business might want an apartment for a year to be available for different staff members, in the right location you might find that holidaymakers will fill the same apartment with a series of one- and two-week stays.
Finally, serviced accommodation can offer opportunities that require a low level of involvement. Many opportunities occur in blocks where purchasers finance the developer’s construction costs and a single operator will manage the block and properties within it. In these situations, the operator will frequently lease the property back, taking care of the bookings and management and paying a guaranteed income. This also avoids any risk from voids since these will be shared and absorbed the operator and all owners within the block.
Even where more direct involvement is needed, the nature of serviced accommodation can present fewer risks than traditional real estate investment. Frequently the servicing company will provide all the services and maintenance needed, meaning that there’s no risk of you, as the ultimate landlord, being called upon to fix problems.
They additionally benefit from a regular servicing visit. Even if servicing is nothing more than a weekly clean of specific areas, the visit provides the opportunity to spot problems and address issues quickly, rather see them develop — and become more costly — during a long tenancy.
And, whatever the model used, the type of client who uses serviced accommodation tends to be lower risk than traditional rental models. Ironically, people staying temporarily in serviced accommodation tend to treat it better than tenants for whom it is their home. While this rule is not universal, it means that, on average, the costs that can be involved in repairs, maintenance, and general upkeep, are lower on average than if the property were in the traditional rental market.
Serviced Accommodation Investment Fund
Many individuals are convinced of the benefits of investing in Serviced Accommodation. However, the day to day management to serviced accommodation is a ‘full time job’ for investors.
Other investors live in a different country to where they want to invest, which means taking advantage of the serviced accommodation business model is prohibitively time consuming.
There are many Investment Funds investing in serviced accommodation although one of the best and most trusted is Property Secured Investments, winner of the Sophisticated Investor Magazines ‘Best Property Investment Fund’ award.
What are the problems with serviced accommodation?
While there are lots of upsides to investing in serviced accommodation it is not without its downsides, some of which might mean that it’s not the right model for you.
It is important to be clear on the restrictions that might be in place on a particular property. These might be put in place by the building owner, restrictions in any finance agreement you use to buy the property, or even local regulations that set limits on leasing and letting apartments.
Checking these can be particularly important if you are purchasing a property that was not originally intended as serviced accommodation. Many local governments in tourist areas, for example, have imposed restrictions to help protect local hoteliers by making it harder for people using property sharing sites like Airbnb to rent properties. And even if the property is part of a development intended as serviced accommodation, it’s worth double-checking to make sure your circumstances wouldn’t leave you falling foul of any rules.
You should also consider the risks that come with any real estate investment of not making a return. While serviced accommodation is a growing market, there is no guarantee that your property will be consistently occupied. It’s particularly important to consider this if your property is in an area that might not be attractive, or that is unattractive itself. Serviced accommodation in a business area might seem a good investment, for example, but might be at risk if the economy changes or if a major employer leaves. Likewise, buying in a tourist hotspot might seem a wise move, but consider the competition from hotels and other serviced accommodation and whether the tourist market can sustain you.
And consider the risks to the value of your investment. Property values can go down as well as up, and serviced accommodation is not immune to this. Indeed, although it’s a growth market the number of new entrants means that appreciation of serviced accommodation is frequently not as high as real estate in general. Serviced accommodation is likely to be much more suited to cash-flow investors until the sector is more established.
What do look for when investing in serviced accommodation
If you decide that serviced accommodation is for you then choosing your investment is much like choosing any real estate investment.
First, identify the type of investment you want. If you are looking for a low-involvement investment, then you can focus your search on purpose-built developments where a management company will do most of the work for you. If you want something hands-on, then you can start looking for promising properties, as well as thinking about how you will arrange the servicing.
Next, you need to find your location. Like any real estate purchase, location is everything. Serviced accommodation is largely based in city centers where it can serve both the business and tourist markets, but this does not mean it can’t be anywhere. Think about the type of tenant you want or will attract at specific locations, then about relevant factors; is the property suitable for the type of customer you want, will they be able to get there easily, and can they get from there to where they need or want to be?
Finally, do your due diligence. Make sure you are confident that there is a market for your property, especially if you are looking away from city centers. Serviced accommodation can succeed off the beaten track, but only if there is sufficient demand, and you need to be sure that the lack of competition isn’t because it’s somewhere no-one wants to stay. And make sure there’s nothing planned that might affect the value of your investment. Are there new developments planned that might present competition, or changes to local infrastructure that might leave your property less attractive?
A great investment opportunity
Serviced accommodation presents a great investment opportunity for some people. It isn’t ideally suited for people beginning their investment career, and, because the market is still developing is better for those who can afford to invest the capital for a long period to focus on the yield.
However, for those looking for a property investment, especially one where they can be quite hands-off, serviced accommodation offers the potential for a very rewarding yield.
Expert Contributor:
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe/
Originally published at https://sophisticated-investor.com on May 16, 2021.
