Whatever the economic fluctuations we’ve had to endure throughout the past decade or so, property still represents a relatively stable investment. Nonetheless, it goes without saying that certain types of property are more profitable than others while some are (by virtue of their location or specifications) prohibitively expensive for the neophyte investor. The real estate game may be a relatively safe one (compared to investment in, say, Bitcoin), but there are still pitfalls that can prove to be a honey trap for those who haven’t studied the market.
Let’s say there was an investment that claimed to offer a guaranteed rental return of over 6%, with a long term lease and fixed annual rent increases. Moreover, this investment is comparatively affordable with no need for expensive renovations and represents a minimum of investor intervention.
Seems too good to be true right? Well, that’s because it probably is.
Serviced apartments or apart hotels are very appealing to nascent investors for the above reasons but while it’s tempting to look at them as real estate opportunities it’s actually far more accurate to look at them as hotels.
The appeal
On the face of it, apart hotels are a very attractive prospect. They offer the kind of gains that a property investment company would tell you are laudable. They tend to offer a 6-7% rental return which is higher than a lot of houses and apartments as well as appearing low risk as they tend to come with a lease backed agreement with the hotel operator. Nonetheless, despite these attractive incentives, investors should be wary.
The hotel problem
Serviced apartments are really just strata-titled units within a hotel development, and are not beholden to the same market conditions as traditional real estate. Property may still be a safe investment, but the hotel industry is relatively high risk in nature and dependent on generating a lot of custom to cover the massive overheads. Hotels are usually owned by either a single investor or a small group of investors. The apart hotel phenomenon was a product of the industry’s need to reduce their funding costs and free up some of their equity by pitching the properties to regular investors who wouldn’t usually look twice at the hospitality industry.
The harsh reality
Many investors find that the rental return falls very wide of the 6-7% mark they’ve been promised. They either notice a significant shortfall in rental income or a pronounced drop off after the guaranteed rental period.
The trouble is that the tourism industry upon which hotel chains are dependent is dependent on many factors from which residential property is fairly well insulated. External factors such as airline strikes, bad weather and even the threat of terrorist attacks can have a devastating effect on the hotel industry. Whatever bold claims are made at the point of sale, they’re pretty much meaningless if the company making them goes out of business.
Serviced apartments also have a nasty habit of losing their value and due to their inherent risk, a lot of people have trouble finding the finance for them.
Unless you’re a seasoned investor who’s really done their homework, the chances are that an investment in serviced apartments is too good to be true.
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