Hi to everyone. [biggrin]
I am not sure if this topic has been discussed earlier. I have checked but couldn’t locate a suitable thread.I am interested in purchasing a unit which is part of a five star complex (full hotel facilities), direct on the beach, in Palm Cove (just north of Cairns). One of the reasons I am interested in this property is the fact that it will be managed by Accor under their premium brand (Sofitel). A very detailed financial analysis has been completed by an independent(?) chartered accountant, showing the property to be cash flow positive within the first year, based on borrowing 100% of the purchase price. This property is different from the usual form of holiday letting, in that, as mentioned earlier, the property provides the full gamut of 5 star hotel services including restaurants, bar, 24 hour room service, pool service, concierge, and so on. I am aware of the extra costs this type of investment incurs. For example, marketing and brand fees, furniture replacement levy, housekeeping fees, the rather high costs associated with body corporate fees and so on. In fact, this all adds up to 51% — my share therefore is 49% of the revenue.[stun]
I have looked into occupancy levels in the northern beaches area and assessed returns based on three periods (low, mid and high season — with different rates applying). I have also assessed rates applying at comparable properties to ensure a reasonable base for my calculations. I then assumed a year round occupancy level of 65% (ie 35% of the year the property would not generate any income). Based on these various calculations, the property looks quite feasible.[thumbsup2]
I was wondering if anyone out there has had any experience (positive or negative) with this type of investment. [8]
Do you believe this type of investment offers benefits over and above the traditional type of investment property (residential).
Please feel free to provide detailed answers. I would welcome as much input as possible.[sunny]
Thanks in advance
Looking forward to a spirited debate[cap]
Hi,
one thing I should have mentioned in my post — the property in question will have full conference facilities — which should lead to an influx of large delegate groups (great for revenue). Oh yes, one other thing — Accor in managing the property will direct their marketing to overseas as well as local markets. Again a positive in terms of keeping those beds filled!![happy2]Hello Mortgage Advisor,
I agree with your post — cyclones may be a problem. That’s why my projections are based on 65% occupancy. Also cyclones tend to occur during the summer when school holidays usually mean high occupancy levels.
Secondly, could you explain your comment “difficult to use such properties to replicate”. Do you mean that Banks and other lending institutions are reluctant to use this type of property as security for future property acquisitions.
Regards,[cap]
Hi Elika
I’m not familiar with Accor but can only tell you what i have experienced. I have a holiday apt in a tropical region (tho not as fancy as yours!) and was initially worried about cyclones etc. For a cyclone to go through a 10km patch of coast (the destructive part of the cyclone) out of the whole 4000km is reasonably rare. There is always that threat, yes, so take out insurance. Also you can have a look at the local meteorological office as they usually have a past history cyclone tracking map which is always interestingto look at.
When you say its ‘+CF in the first year’, does this include your strata fees, rates etc? For eg. my place cost $176K (100% finance) the average weekly rent (total year divided by 52) is $300/wk, which looks like +CF at 100% finance at first glance. Strata rates are just under $1000 per qtr. Rates and management services etc take this back to break even point.
It is true in my experience that banks don’t look on these favourably as the occupancy is not guaranteed (to them) but it also depends on how you describe it!![snitch] I describe mine as a 2br unit in a strata lot – which it is. I tell them the average weekly rent which is also correct. So by no means am I hiding any information except for the word ‘holiday’. I’m sure there are people out there who disagree.
One more comment – you mentioned summer holidays usually mean higher occupancy rates. Not the case. Summer is the wet season, v.hot, humid, AWFUL weather where it seems you cant escape the heat (my aircon was costing me $300/week to run!). Very little or nil occupancy during this time. Winter is peak season as the tropics are the summer escape in the middle of the southern cold winter.
Comparing this to standard residential, to me they both have pro’s n con’s. Residential has rental security, lower strata costs, its up to you to organise any maintenance if its brought to your attention. Holiday places don’t have the rental security but do tend to be reliable consistent rental flow, all maintenance is taken care of in the highest standard, and you have a place to stay in a 5star palace for free!!
I wouldn’t favour one or the other, and I certainly wouldn’t worry about buying in the tropics.
I used to swear never to live up there because of “all” the crocs which scared me half to death! I just needed to learn about the environment (cyclones included) before making a judgement on the tropics.Hope this helps a little.
Hi everyone,
I posted this message some time ago and apart from some discussion of cyclones, the list seems to have been very quiet in terms of the pros and cons of buying a holiday unit versus a residential unit. Now having read the discussion posts over the last few months I know that this list is anything but shy and certainly very opinionated. So guys, let it rip — tell me your views — don’t hold back.LOOKING FORWARD TO A GREAT DISCUSSION[biggrin][biggrin][biggrin]
A depreciation entitlement would have been factored into the financial projections given to you. Check what rate they have used for the building depreciation – Divison 43. They’ve possibly used the 4% rate for ‘short term accomodation’. I suspect that a unit in that property would not qualify for that rate, but I would need to know a bit more about the facilities in the particular unit in question. Chances are the rate should be 2.5%. That may put a decent dent in the projections.
Scott
Hi Elika,
There are a couple key pieces of information missing from your post that could significantly alter the suitability of your investment.
Lenders get very wary about lending at 80% on small holiday letting units. Anything under 50 sqm (?) will see them expecting you to put in more than the usual 20% (or less with LMI). In effect an excess use of equity or cash with such an investment may delay subsequent purchases.
In recent years lenders have firmed up some lending policies and small holiday units tend to one of the first that have their lending policies adjusted. As was mentioned earlier lenders have had a reluctance to allow any equity in small holiday units to be used as security for other lends – as such you may run into a ‘lending brick wall’
You will also need to find out how rents are distributed – some apartment blocks use a rental pooling system which helps overcome any periods without a tenant in your unit – this is to your advantage if you unit is the one without a view and near the airconditioning unit.
As Scott has indicated the figures used were likely to be based on a 4% capital allowance claim. This would be significantly enhanced by the large number of low value pool write offs and plant and equipment claims.
Be aware that the projected figures also probably used a high income level to maximise the effect of any depreciation claims.
Derek
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