Housing investors turn to boarding homes to boost returns

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Housing investors turn to boarding homes to boost returns

June 17, 201510:47 am

A surge of boarding houses is popping up around Sydney, as new incentives to build affordable housing, and a welcoming attitude among council planners, make the asset class increasingly appealing to developers.

Pubs, warehouses and even plain old houses are being converted into affordable lodgings as demand soars from students and key workers for low-cost housing close to the city.

Those who have built them say their low vacancy rates and strong returns make up for the fact that they can be troublesome to run and tend to make you unpopular with the neighbours.

Developer Jason Cooney built his first boarding house eight years ago in Kensington, in Sydney’s east. His family had owned the property for decades – a house on a 700-square-metre block – and Cooney added 12 rooms to the rear. He’s since bought or built three more boarding houses in inner Sydney suburbs, with a total of around 100 rooms.

Cooney says he gets a gross return of around 6.5 per cent, which is far higher than houses or apartments, and demand for the rooms is strong. His family also builds apartments, but he says where you might get five two-bedroom units from a block of land, you could instead build a 24-room boarding house, which brings in a much greater rent.

“It definitely fills a gap in the market,” Cooney says. “There’s people who are on Newstart, or they’ve just finished university and haven’t found a job yet. They can’t commit to a lease or all these bills, so at a boarding house they can just pay the rent, keep their budget simple and leave when they like.”

On the rise

Cooney’s not the only developer taking interest in affordable housing. City of Sydney councillor John Mant says there’s been a big increase in boarding house applications and approvals since NSW state legislation designed to incentivise boarding houses was passed last year. In the City of Sydney local government area alone, 16 development applications for boarding houses have been submitted in the past year and the council has approved 10. The council has only knocked back three, and a further two were approved after court battles. In total 255 new boarding rooms have been approved, and there are 11 more applications awaiting approval.

The people who stay in them are largely students, although there is also some demand from key workers and young professionals who want trouble-free bolt-holes close to the city.

Aside from issues like housing affordability, long-term social trends are at work making low-fuss affordable housing an appealing market sector to pitch to.

Professionals are marrying later and are more open to travelling for work. Young people are more focused on skilling up rather than settling down.

The latest ABS Census figures showed an increase in group households as growing numbers of people sought low-cost and low-commitment sharehousing over taking out a mortgage.

Mant, who has had a long interest and involvement in housing policy, admits he has some reservations about the asset class. But on the whole he supports them and says property owners who apply to build them will be “well treated by the City”.

“From the City’s point of view it fills a definite market need, and a definite social need,” Mant says. “There’s an image problem with the concept of a boarding house – that there will be drunks in the street and rowdy parties. But I think as time goes on that image is likely to change. There are people who are temporarily here in Sydney, or people who work in the city and are quite happy to live in that smaller space.”

Good returns

From a developer or landlord’s point of view, there are some desirable incentives. Zoning usually isn’t an issue and they can often be converted from an ordinary house. They can be created on general residential and low-density residential land, and don’t require an area that’s zoned for apartments. But the land needs to be close to public transport and within 400 metres walking distance of a town centre or mixed-use area.

The developer doesn’t have to provide anywhere near the number of parking spaces as an apartment block. Despite being classed as affordable housing, there are no rent limits – the owner can charge as much as the market will pay. The affordable aspect comes from an upper limit on the size of a boarding room of 25 square metres, which usually includes an ensuite bathroom, so they’re smaller and therefore cheaper than apartments.

Most enticingly, they can be built 20 per cent bigger than planning limits specify for other housing types.

It’s this rule that bothers Mant. It seems hypocritical to him that building size limits are created based on what is most appropriate for an area, and then exempted for some types of buildings. Developers exploit loopholes like this to wrangle more yield from a block of land, enraging the neighbours, he says.

“That is an issue for all schemes that have bonuses,” Mant says. “Applicants say ‘If we provide X and Y, will you give me more height, more floor space?’ And then having got the approval for more height and floorspace, they say ‘Oh, we can’t afford to provide X and Y.’ So then you say ‘Well, it’s too high and too big’, and they say ‘Hang on, you said it was all right.’ It gets very difficult to say that as a matter of design it’s too high and too big.”

But incentives like this are necessary to bring about affordable housing, he says, because the housing market is distorted by tax subsidies to home owners like negative gearing which inflate market values and disincentivise the creation of rental housing.

He says the rules are much improved on those created by the former NSW Labor government that allowed boarding houses without adequate parking to be built in areas far from transport, cluttering up suburban streets with cars. They are heavily regulated for fire standards, occupancy rights have been introduced for boarding house residents, and the owner has to hire a full-time manager when there are 20 or more rooms, so neighbours always have a go-to person when there are complaints.

Troublesome to manage

Cooney says boarding houses are desirable because they bring a higher return, but they also come with a range of negatives you have to factor in.

They can’t be divided into strata title, and can be difficult to sell because investors aren’t familiar with the asset class. They’re also expensive to build. Each room has an ensuite, and bathrooms are one of the most expensive parts of a development.

This means they need to be viewed as a long-term investment. Despite this, demand appears to be improving, he says, and he has lost out at a number of recent boarding house auctions to people who have pushed the price beyond viability.

They can be troublesome to manage. Even when the tenants are well-behaved, they are often students fresh out of the family home who do things like leave the microwave on, or make too much noise, or come in a few days late with their rent. But you can address these things by hiring a good manager.

When you build them to order, you can’t go overboard. There are customers like single professionals or mobile workers who are willing to pay strong rents, but they’re a minority. “You can’t have wall gardens or nice glass facades; you can’t get too fancy,” Cooney says. “That’s where investors can get caught out. They go for the high-class customer but they’re about 20 per cent of the market.”

Cooney’s architect, Michael Kitmiridis, has designed three boarding houses since the new regulations came into play and has consulted on another that didn’t go ahead. They typically have communal living areas and shared cooking facilities, in addition to a kitchenette in every room.

He’s working on one now before City of Sydney Council which proposes a 14-room boarding house on a 302-square-metre block – not a big piece of land although large compared to other houses in the area.

But they can be controversial. “Usually there is opposition because of the stigma attached to boarding houses,” Kitmiridis says.

“Everyone agrees we should have them, everyone identifies with the issue of providing low cost accommodation for young people. But unfortunately nobody wants them next to their place.”

Read original article here.