Investing in niche market property

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Super funds have an abundance of choices in regard to property type and these choices extend way past your average residential investment or business property. Here we explore niche market property.

So what is a niche market property?

In a nutshell, a niche market property is any property that doesn’t fit the model of the standard house and land or strata titled home unit. It includes such options as serviced apartments, hotels or resorts, retirement homes and student accommodation. At times, they can make a viable investment, yet equally they can be dismal performers, rarely providing quoted returns and suffering from lacklustre capital growth.

Let’s take a look at what’s on offer:

Serviced apartments and hotel rooms

Strata Titled serviced apartments and hotel room investments are available to investors and are often situated in tourism destinations.

Generally, these properties will be managed in one of three main ways:

  1. Income is pooled and then distributed to all apartment owners, according to a pre-determined formula based on the original purchase price. Income is paid from this pool regardless of the occupancy of your individual apartment;
  2. Apartments are leased back to the hotel operator for an agreed period, and the operator pays the owner a rent regardless of the actual occupancy;
  3. Your apartment is managed separately, often on a roster basis – you receive the actual rent paid less the management fee and costs.

Tax benefits apply in the same way they do for residential property investments, unless the apartment is bona-fide short-term traveler accommodation, which usually means it must be available for stays of one night and have a restaurant attached.

Benefits 

  • Pooled income reduces your risk of vacancy – you receive income even when your apartment is empty.
  • A qualified manager is overseeing the property to ensure that damage is minimized.
  • Often there is a provision made for a fund for future refurbishment.
  • Depreciation can be very high, making the cash flow exceptionally positive.
  • Leasebacks can guarantee cash flows.

Drawbacks

  • These properties are often priced according to a forecast return, which is usually well over market value for a standard apartment in the same area.
  • Where ‘Management Rights’ are involved, these may be purchased by an inexperienced manager, who is then hard to terminate.
  • A leaseback doesn’t guarantee that a manager will perform well.
  • Expenses may be underestimated, eating up your profits.
  • An oversupply of similar properties at the time of purchase, or in the future, will directly impact your ability to sustain the returns you need.

Retirement villages

There has been swift growth in the incidence of retirement villages being built by developers – and subsequently bought by investors – to cater to the demand for rentals by the over 55’s. These are often small, one bedroom apartments, often two sold as one lot. The pension is garnisheed for rent and all have onsite managers who take a fee. Some supply meals, linen and cleaning services, which are paid for by the investor.

Benefits

  • Low risk tenants.
  • Well maintained properties.
  • Low turnover of tenants resulting in high occupancy rates.
  • Very low incidence of rent default.

Drawbacks

  • Some developments are still offered at a price that reflects return, rather than fair market value.
  • Few managers are experienced in the seniors market.
  • Banks may not lend.
  • Government rules regarding retirement villages in each state can be onerous.

Student accommodation

There is no exact model for these properties. They vary from dormitory-style accommodation, where rent is the result of tariffs paid by students for short-term accommodation, to townhouses or villas with individual rooms and bathrooms and a large living, or ‘common’, area for cooking and relaxing.

Benefits 

  • Where situated very close to a major university or learning center, demand can be very high.
  • Overseas students from wealthy families often make up the bulk of tenants, resulting in a low incidence of rent default.
  • The ability to rent one lot to many students (sometimes up to six or eight) means the risk of vacancy is more easily managed.

Drawbacks

  • The design of many properties (some without laundries or adequate kitchen facilities, and others with too many bathrooms per bedroom) can make these difficult to lease to the standard market in the event that the student market falters.
  • The reliance on international markets for students can be affected by unrest in the world or the economic problems of other countries.
  • There may be a tendency toward oversupply in this market, leading to high competition and a lowering of returns.

Banks may not lend.

Questions you should ask

If you’re considering buying a niche market property, be sure to ask the following questions first:

  1. What is the background and experience of the manager?
  2. Where the property is purpose built, can this be adapted for general use in the event that the original purpose fails?
  3. Is the property at market value?
  4. What are the terms of any leaseback, and does the manager have the financial resources to honour this leaseback
  5. What costs are included in your management fee and are they reasonable?
  6. How have the returns been forecast? Are they actuals or based on a best-case scenario?
  7. Where a rent guarantee is offered, what are the terms of this guarantee?

These are just some of the many questions which should be asked. Note that they have very little to do with the physical appeal of the property, and everything to do with its financial viability both now and in the future!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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