Melbourne serviced apartments yielding strong returns
As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.
March quarter ABS tourist accommodation figures for Melbourne’s serviced apartment market (15 rooms or more) suggest residential investors should take a closer look at the sector.
Melbourne, with 107 apartment complexes and 7,348 serviced apartments, makes up more than three quarters (78%) of the 9,525-room Victorian market.
The capital city has enjoyed strong growth in all key aspects of the serviced apartment sector.
Occupancy rates increased strongly to 83% in March 2011, compared to 74% at the start of the year and 77% a year ago.
Rooms occupied by guests rose from 167,000 nights in January 2011 to 188,000 in March, after suffering a slight dip in February. They are 8% higher than March last year, when room nights tallied 174,000.
Over the March 2011 quarter, overall guest numbers rose from 98,000 arrivals to 107,000, while total guest takings were up 6% to $34 million.
On average, one night’s accommodation in a Melbourne serviced apartment generates $181, compared to $176 a year ago, and not far off the $199 a night a Melbourne hotel generates on average per paying guest.
Private hotels, motels and guesthouses in Melbourne generate about $130 a night.
Apartments selling at under $200,000
Against the backdrop of a strong growth, searches of real estate listings reveal a number of affordable serviced apartments for sale in the Melbourne CBD.
Agents are targeting the properties at residential investors, who would otherwise not have the funds to gain direct access to the leisure sector.
A one-bedroom Oaks serviced apartment at 480 Collins Street in the CBD, advertised for sale by First National Real Estate City Residential at $165,000, currently returns net rents of $10,143 per year and 3% capital growth.
The building offers tenants a business centre, pool, gym, sauna, laundry service and restaurant. All outgoings are paid by the tenant.
Just outside the Melbourne CBD, Grant Wallace from Hocking Stuart is selling a Quest apartment at 651 Chapel Street, South Yarra, for $300,000. The apartment offers a rental return of about 5%.
And in Melbourne’s Docklands area Richard Mindraoui from City Residential Real Estate is selling a 65-square-metre, one-bedroom apartment leased by the Mantra Hotel at 222 Russell Street for $310,000.
Mindraoui says the apartment brings in net rents of $18,720 per annum and is currently secured with a 13-year lease.
Regional markets in the doldrums
The ABS figures provide little detail on regional serviced apartment markets outside Melbourne.
Where they are available, it appears these markets have suffered the same fate as other regional markets in Queensland and NSW, where occupancy rates and takings have trended downwards.
In western Victoria, which includes the regional cities of Geelong and Ballarat, serviced apartment occupancy ratios have fallen from 74% at the start of year to 61% in March 2011.
Over the quarter, monthly guest arrivals dropped from just under 11,000 to just over 9,000, while average takings per room per night dropped dramatically from $209 in January 2011 – higher than Melbourne – to $163.
This decline reflects the fact regional serviced apartment markets are more heavily reliant on domestic tourism and leisure visitors.
However, while in other regional markets in NSW and Queensland serviced apartment guest numbers have declined in line with drops in hotel guest numbers, suggesting a drop in tourism demand is to blame, in western Victoria, hotel occupancy have strengthened over the quarter from 65% to 69%.
This suggests the western Victorian serviced apartment market is weak in its own right.
For the state as a whole, Victoria’s serviced apartment market continues to perform strongly, mirroring Melbourne’s performance over the quarter.
The state’s occupancy ratio stands at 77% in March 2011 compared to 72% at the start of the year and 74% a year ago.
According to research by CBRE, the serviced apartments market is generally 10% more profitable than the hotel market, while yields on serviced apartments averaging between 4% and 5% compared to 3% to 4% for residential investments.
“The unique blend of major hospitality business and strata real estate has produced an investment class that has given opportunity for individual “mum and dad” buyers to enter a sector previously the domain of high-net-worth individuals and institutional investors,” says Ken Smith, CBRE Hotel’s regional director of valuations.
