Developers and investors turn their heads to boarding houses

Traditionally, banks have provided loans to individuals for a property on individual land. More recently lending has gone to developers as a construction loan, which is then paid back through the sale of individual units.

The difference with boarding houses, compared to a typical apartment complex investment, is that the boarding house is being built as a business, rather than as property to be on-sold for capital gain.

According to experts, the attraction with boarding houses is the long-term return from rent that can be commanded, which is in the 8-9 percent net rental return compared with the typical rental housing return of 3-4 percent.

New gen boarding houses are attracting a lot of interest, including those mum and dads running self-managed super funds.

According to Nick Tuxworth, Associate Director, Metropolitan & Regional Sales at Savills Australia, new generation boarding house developments are a very different product.

“The rooms are typically self-contained with kitchenette and en-suite. They are ecofriendly built, come with Wi-Fi and other state-of-the-art design and interiors. They are now also subject to formal occupancy agreements that offer tenants (and landlords) more security and certainty.

“Residential Tenancy Agreements can also be signed and is the preferred choice for property investors adding to a better layer of protection, larger bonds and in the case of tenancy breaches more clarity around what action can be taken.

“Standard agreements are usually 6-12 months in length, rather than short term (3-6 months) and are generally renewed by the occupants if both landlord and tenant are happy with the tenure. Occupancy rates are very high, usually well over 90 percent”.

Mr Tuxworth went on to say that these new gen boarding houses offer self-contained furnished studios from 12sq m-25sq m with all utilities included in the rent or occupancy fee to people like young professionals, middle-aged people, divorcees and retired people who are squeezed out of the housing market because of the affordability gap between home ownership and their incomes.

“Definitely in the last six to 12 months I’ve really seen a massive spike in people lodging DAs and they’re all wanting a piece of the action. They are very hard to get through councils because they’re generally surrounded by residential properties, hence the reason why owners are cashing in on approved sites.”

According to Ollie Ridley, Sales Executive, Metropolitan & Regional Sales at Savills Australia, “The days of boarding houses being perceived as derelict are long gone as they are seen as fully self-contained studios and owners are now taking advantage of developers and investors paying premiums for sites as they are difficult to get through Councils.

“Developers in particular are buying boarding houses because of the low establishment costs and the ability to provide much-needed cash flow during the building of other projects,” he said.

HSL Group Pty Ltd has been responsible for the successful development and construction of new generation boarding homes in Sydney.

HSL Group Pty Ltd Director, Mr Hanna Ibrahim has received an influx of enquiries for the construction of boarding homes and said “Developers are investing in boarding homes to provide affordable housing solutions for the rental market.”

Demand has also shot up due to the positive changes in car parking laws surrounding DA approved and fully build operating boarding houses.

Mr Tuxworth has had clients see returns of up to 30% on their equity and banks are starting to lend more as the Government is putting pressure on developers for these assets to be built for affordability purposes.

“From a tenancy point of view, boarding houses are definitely the most affordable option in Sydney and the people leasing them are happy to live in a 25-square-metre room where they can save $200 and not rent a 2 bedroom unit.

“The majority of the tenants are young professionals and students, looking to save money and don’t require a lot of living space,” he said.

Nick Tuxworth and Ollie Ridley of Savills Australia have five DA approved boarding houses for sale in Rydalmere, Yagoona, Frenchs Forest, Bexley and Roselands, and Mr Tuxworth said the team are getting between 150-200 enquiries per campaign as new comers enter into the market.

The properties include:

1. 66-68 Dudley Street, Rydalmere – DA approved for 38 self-contained State of the Art units arranged over ground and first floor levels with a large outdoor courtyard on a 1,195sq m* site which is located on the northern end of Dudley Street and is Zoned R3 Medium Density Residential. The potential Gross Annual Income is $700,000* ($350pw per room) and Dundas Train Station is situated 170m* north east which provides frequent train services in the CBD
2. 26 Frenchs Forest road, Frenchs Forest West- DA approved for 19 rooms. The property comprises an existing 3 bedroom residential house with a rare DA approval for an 18 room boarding house. This asset provides investors the opportunity to purchase, manage and control 18 fully self-contained units in Sydney’s exclusive Northern Beaches which benefit from ample natural light, private outdoor space, appealing common areas and secure basement parking. Once built, 18 self-contained rooms in this premium location will deliver the purchaser outstanding secure cash flows for many generations who will be set to benefit from the emerging asset class of build-to-rent accommodation.
3. 2-4 Petty Avenue, Yagoona – DA approved for 41 rooms arranged over three levels which can accommodate up to seventy-seven (77) tenants and twenty-one (21) car parking spaces at basement level. The Potential Gross Annual Income is $700,000pa* ($330pw per room). There are 5 x Single Rooms and 36 x Double Rooms on a 1,062sq m* site located on a quiet cul-de-sac – Petty Avenue (30m* frontage). The property is Zoned R4 High Density with an attractive location and surrounded by residential housing. The property is of high quality design by Urban Link architects. Bus stops are situated just over 100m* to the north and Yagoona Train Station is situated 280m* south east of the property.
4. 290-292 Forest Road, Bexley – DA and CC approved for 18 rooms + a commercial/ retail shop and 4 car spots with an estimated gross rental return $400,000. Bexley is located 14 kilometres south of the Sydney central business district, in the local government area of the Bayside Council and is part of the St George area.
5. 18-20 Canary’s road, Roseland – has now sold for $1,215,000. Property has a ppotential Gross Annual Revenue of $170,000pa* for 8 x Single Rooms and 2 x Double Rooms on a 573sq m* corner block – Canary’s Rd (15.6m* frontage) & Ridgewell St (29.4m* frontage) Zoned R3 Medium Density with low cost of construction with at grade parking. There is a bus stop located at front of property and it is walking distance to train stations Lakemba and Wiley Park.

The five properties are for sale exclusively through Savills Australia, closing in March 2020.

*Approximate