Serviced Apartments – a 5 year review

The real test for how a service apartment investment is performing comes around once every 5 years. That’s generally how long the term of the lease is before the operator or tenant exercises its option to renew and the rent review to market takes place.

The general framework for a Serviced Apartment Lease has the following facets:

1. The initial rent was set at an attractive yield of say 6.5% of the Sale Price


2. Annual rent increases were fixed, say 3% per annum for the term of the Lease, usually 5 years


3. The Tenant pays recurring body corporate fees


4. The Landlord paid rates and expenses of a capital nature such as sinking fund contributions


5. The Tenant has multiple options, usually 4 x 5 years


6. The Landlord will be up for refurbishment costs, such as re-carpeting and painting to maintain the standards for a serviced apartment operation. Factor in $10 to $15K every 5 – 10 years

There are certainly attractions to the long term investor in the serviced apartment model as presented above which is why they have sold very well to the investor who is attracted to the passive investment model.

Cracks however have started to appear in the model which should be of great concern to the Service Apartment Franchisors if they want to protect the industry’s reputation.

The biggest crack is the 5 year rent review to market and Landlords are seeing drastic rent reductions. One example is a Sydney Serviced Apartment Operator who has put to his Landlords rent reductions of between 25 – 47%. When a valuer is appointed and makes a final determination is yet to be seen. This is the worst example I have heard so far but it is not an isolated example of operators seeking wholesale rent reductions.

Many landlords will be looking for the exit door but what effect does rent reductions have on the re-sale value of their investment is obvious. Not only that, the whole industry is put at risk when the industry's reputation is damaged by precedent that is now being set by tenant operators.