Serviced Apartments - A New Form of Strata Abuse | Owners Corporation Network

Serviced Apartments - A New Form of Strata Abuse

Serviced apartments are a welcome and valued addition to Australia’s tourism initiative. Without them our tourist industry would less easily satisfy the needs of the traveller which is either an independent group or visiting for a slightly longer period. For travellers needing more than a hotel room – the serviced apartment is ideal.

It was inevitable someone would take this tourism initiative, merge strata title and come up with a “serviced apartment” development model that shared capital cost amongst lot owners. No problem – unless the development becomes schizophrenic.

So how does the innovative property developer, with no connection to the hotel industry but a serious hunger for “double bunger profit” employ strata title to come up with a de facto hotel?

First, take a good site to market and convince investors that letting returns for the lots in the scheme are going to be better than market average returns for residential tenancies if the property is placed in a short term “letting pool” under the exclusive control of one manager.

Secondly, sell the “letting pool” to a business operator who has exclusive use over common property to facilitate the operation of the development as a hotel.

Problems do not arise if the developer:

  • allocates sufficient common property infrastructure necessary to operate short term tenancies on site;
  • local government planning controls permit the operation of a hotel or serviced apartments in the precinct;
  • the building is approved and constructed for a commercial rather than residential use (eg with beefed up fit out and fire and other occupational health & safety issues); and,
  • all purchasers in the strata scheme place all lots in the letting pool.

Buildings, constructed and operated with these issues addressed, operate successfully in tourist destinations (Gold Coast). All lots are in the short term letting business operated by the manager.

Unfortunately, an overheated property market (Sydney) will cause developer schizophrenia.

A developer, confronted with a purchaser looking for a home to live in and willing to pay more than an investor will pay, always sells to the owner occupier. Such action immediately:

  • pollutes the serviced apartment model;
  • imports conflict; and,
  • undermines the economic viability of the serviced apartment business sold to the manager.

The building becomes schizophrenic because serviced apartments are no longer occurring in whole contiguous floors throughout the building. The building takes on a checker board appearance as short term tenancies occur in an isolated fashion throughout the development.

Such buildings inevitably turn on their building manager. Owners Corporation Network (“OCN”) records ( reflect a number of buildings where the building manager was successfully shut down, with the assistance of Sydney City Council, because the lots in the strata scheme were only ever approved for residential and not commercial use.

Worse still – OCN has seen real estate agencies in Sydney create a “black market” for hotel rooms by offering CBD apartments (with service) on short term tenancies. The investor client is easily enrolled in funding the cost of furnishing the apartment to a “specified” standard by the promise of returns higher than could be achieved from long term tenants.

The outcomes for the Sydney buildings hit with the short term checker board or hijacked by the black marketeer are tragic.

To begin with, the residential buildings have design and fitout that does not anticipate the rapid turnover of people with suitcases and holiday aspirations. Common property degrades easily – and with it the capital values of all owners. The Owners Corporation will soon realise amenity is being lost by an illegal use of lots in the scheme. The pressure to cause local government to shut down the illegal use is unavoidable.

Fire and safety within residential buildings do not meet the prescribed standards that apply to hotels. For example, a residential apartment is not required to have a fire exit map affixed to the back of the front door. Illegal use of residential lots as black market hotels introduces a life safety risk.

Holiday makers have different aspirations to permanent residents. They should. But different aspirations “under the same roof” will always bring about an unhappy end. The best OCN example is the CBD apartment booked for a “buck’s night” resulting in broken glass and wild unsupervised behaviour around an indoor swimming pool at 2.00am. Owners Corporations do not (and should not) have the security procedures to deal with such events.

In summary, strata title lots can be the capital raising mechanism for a successful serviced apartment hotel business. However the development must be uniform in its application. At the very least serviced apartments need to be in contiguous floors and separated from residential users.

Less than this guarantees management and property investments will degrade.

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