| Investment Property Snapshot |
| What: A 48 square metre, one bedroom apartment, leased to the Spencer on Byron Hotel. |
| Where: 1708/9-17 Byron Ave, Takapuna. |
| Estimated Net Yield 4.1%. (Estimated equivalent Gross Rental Yield 6.2%). |
Hotels in Auckland with this arrangement include the Quadrant, Heritage and Spencer on Byron and there is an established market for the rooms in such hotels when they come up for resale.
Last week Ray White City Apartments auctioned a 48 square metre, one bedroom unit leased to the Spencer on Byron hotel at Takapuna.
It came complete with the hotel's standard furniture
There were multiple bidders for the property and it sold under the hammer for $390,000.
On top of this the new owner will need to pay a special levy to pay for remediation work, including recladding, currently being undertaken on the building.
The special levy for the unit was $64,775 broken into 20 equal monthly payments of $3238, with the vendor having already paid 10 instalments, leaving 10 payments to be made by the new owner totalling
Because the remediation works were known at the time of sale and would have affected the selling price and the new owner can likely expect an improvement in value once the work is complete, the remediation levy would probably need to be treated as a capital cost by the new owner, which would take the total purchase cost to $422,387.
The rent paid by the hotel is based on occupancy so will vary from year to year and in 2017 the rental payment
Based on the total purchase price of $422,387, the 2017 rent would give a return of 4.1%, which is net because the hotel pays outgoings such as rates ($5844) and the normal body corporate levy ($3429).
That's equivalent to a gross rental yield of about 6.2%, which is likely to substantially higher than most rental properties in Auckland, with interest.co.nz's Rental
So the main advantages of leasing an apartment to a hotel operator appear to be a potentially higher rental return from a hands off investment, with the hotel operator managing the property.
Apartments leased to a hotel operator are also exempt from the foreign buyer restrictions being introduced for residential properties, as long as they remain under hotel management.
Ray White agent James Mairs who along with colleague Gillian Gibson handled last week's sale of the Spencer on Byron apartment, said some investors bought such units with the intention of removing them from the hotel's management at a later date, for themselves or a family member to live in.
However investors need to be aware that Inland Revenue treats such investments as going concerns and removing them from the hotel's management could create a tax liability for the investor.
Accordingly potential investors should seek professional financial advice around appropriate ownership structures and the tax implications of such investments.
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19 Comments
4.1% Net, certainly nothing to crow about. I can recall a lot of disaster stories with these hotel management units. The problem being if the hotel is poorly run and experiences low occupancy you have no way to withdraw from the hotel pool. There are also issues with regards the costs that the hotel deducts from the income stream, with the hotel maximising deductions to keep as much of the income as possible. Having read through a few of the contracts for other places like this, I found them to be very one-sided. Set up by the original developer to give all the power to the hotel and leaving the owner with minimal rights.
I understand owners in the Spencer can withdraw from the hotel pool by giving 6 months notice, but the terms will vary from hotel to hotel. It is common now for hotel buildings to be a mix of hotel, owner-occupied, and private rental units.
The Spencer has been around for some time now, so the initial long term lease has probably expired. It also appears to be run pretty well.
The ones I looked had had 5 year lease with 2 rights of renewal for the hotel. Hotel guarantees owner an attractive return for 1st two years. After that the magic happens. Hotel bills each unit for it's share of Management fees, body corp levy, power, water, cleaning, laundry, advertising, upgrade of chattels as required by the hotel etc, etc. If the occupancy is not at high levels, you end up with a monthly bill from the hotel for them having use of your unit for the next 13 years. Of course the hotel will take up the rights of renewal as there is no cost to them in doing so. For the financials I looked at the owner had been paying the hotel $1500 to $3000 per month for 2 years, then gave up and Mortgagee sale. I figured the value of the unit at about -$50,000 with about 10 years left on the hotel contract.
Yes I remember looking sideways at a few new developments like that in the bad old days up to 2008. Fortunately the market appears to have moved on since then.
A complete waste of time and money - overall it is a very poor investment long term as costs accumulate and occupancy varies a lot. The only winners are management and BC. In fact better put the money in TD and have a peace of mind.
The 4.1% is not set in stone ( that is the ideal return) - individually owned property is way more flexible and provides much better CG.
I wouldn't touch these at all ...
I'm not sure what you mean when you say the costs accumulate. The costs are deducted before the distribution is paid to the owner, which is why the return is Net. And the returns quoted are actual net returns over the last two years, not theoretical. As far as I'm aware the amount the BC receives does not vary depending on whether the unit is in the hotel pool or owner-occupied, so I can't see how the BC would benefit one way or the other.
Petty and childish comment deleted - GN.
Comment deleted. GN.
Listen to Kenny and it'll all be fine.
At 200K you might but not at the sort of money that was paid.
That would be be nice, if you could get it. At $200,000 the net yield would be 8.6%. But what sort of asset is going to provide you with a cash return like that these days? The risk profile would likely be formidable.
Agree Greg, for now.
But when term deposits are at 3.5% and 1 year borrowing at 4%- 4.4% and two year borrowing nearer 5% there is just no margin of error here. Now admittedly the purchaser may have bought for cash, but to commit to those returns on cash when the risk profile of the capital value being hit by just a small rise in rates (which I still feel will arrive before the end of 2019). Why would you commit to this small a margin of return with such big downside risk against the capital value?
Each to his own I guess, but at 200K and an 8.6% yield you've protected yourself from capital losses when rates rise at the price paid you're hammered at both ends with a rate rise towards 6% on 2 year money.
Yes, investors always need need to factor in potential movements in interest rates when making investment decisions. But with units like this they also need to take a view on the future of the visitor accommodation market in Auckland, which could be either positive or negative for this type of unit and potentially have more of an impact than any movements in interest rates.
Yep. either way its as tight as a .................................. at the level paid.
4.1% with all the hassle of repairs?
And of course the unit has to be vacant while the repairs take place... so if that is say 4 months, then the yield takes a pretty big hit.
Plus these repairs almost always take longer and cost more than they are supposed to.
Most hotel leases result in terrible returns for the owners. They get what's left after all expenses have been deducted. And their units may not be full all the time.
You can remove them from the hotel pool if you pay the GST on them (so you have a $500k unit, you pay the IRD $75,000) .
With the Spencer on Byron ones, there are more costs to take them out of the hotel pool too. For one, you have to pay $15k to Auckland Council for the extra parking requirements letting it personally will create! Fantastic!
And the hotel in any building may not even let you. What I mean there is that sometimes the hotels want to hold on to a certain number of units so they can operate their business successfully.
Not sure what is involved there, but I would expect a reclad on that place to take 2 years minimum.
!
You can see what effect the hotel expenses and vacancy have on the return, because the rent that is paid each year is net ie, after vacancy and expenses have been deducted. In this case it left $17,116 for the owner last year, which at the purchase price provided a net return of 4.1%. Some will be happy with that return and others not, but property is a long term investment and returns will rise or fall with vacancy and room rates in the Auckland hotel market.
Although the owner would pay GST if they take the unit out of the hotel, the comparison that needs to be made to determine value is how well that would compare with the selling prices of non-hotel units in the same building, or others that are similar elsewhere.
And although there may be other costs involved in terminating the lease, once the unit was out of the hotel, it would be classified as residential rather than commercial for rating purposes, That would result in substantial and ongoing reductions in the unit's rates bill each year. So there's a lot to think about.
How many empty units do they currently have Greg?
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