Demand for more affordable housing in Australia’s biggest cities is driving investment a new generation of boarding houses being built by mum and dad investors.
The trend targets low-income earners, students, young professionals and retirees squeezed out of the housing market by rising prices and lack of supply.
The number of development applications for boarding houses and student accommodation has surged in NSW in the past three years. Applications more than doubled from 27 in 2017 to 65 in 2018, and doubled again to 131 applications in 2019, Cordell Connect data shows.
The term boarding house has a new iteration, with the latest offering small spaces – a minimum of 12 square metres – to tenants on longer-term tenancy agreements but without providing food.
Development is encouraged by the small space allowance – compared to a minimum of 35 sq m for studio accommodation – which allows more units to be built in a single block and potentially generating more cash flow.
“Definitely in the last six to 12 months I’ve really seen a spike in people lodging DAs. They are very hard to get through councils because they’re generally surrounded by residential properties, hence the reason why owners are cashing in on approved sites,” said Nick Tuxworth, associate director, metropolitan and regional sales at Savills.
These new generation boarding houses were attracting interest from mum and dads investors through self-managed super funds.
Developers are also investing in boarding houses because of the low establishment costs and the ability to provide cash flow while they build other projects, he said.
One of a handful of sites Mr Tuxworth is selling is a property in the south-west Sydney suburb of Yagoona which has been approved for 41 rooms to accommodate 77 tenants. The marketing suggesting a potential gross income of $700,000 per annum – which equates to $330 per week per room.
It’s not like back in the day where it was just a room with a shared bathroom and it was a lot more affordable.
— Dimitri Hatzitoulousis, boarding house developer
Builder Dimitri Hatzitoulousis and his brother Tass in 2016 built a boarding house with 15 rooms in Kensington and are planning to build another one next door because of the demand from students from the nearby University of NSW.
“I was thinking about a couple of different options – townhouses or a block of units or even childcare, but instead we decided on a boarding house because we saw there was a need for student accommodation in the area with the number of international students around UNSW,” he said.
“Back then when we decided to build a boarding house, [the planning rules] had become more flexible to promote that style of investment.”
Each room in his boarding house is fully furnished, has a small bathroom and kitchenette, and a combined washing machine and dryer.
He has just had a development application approved for another boarding house next door for 18 units, with construction to begin in the middle of this year.
“It’s not like back in the day where it was just a room with a shared bathroom or shared kitchen and it was a lot more affordable. Now it’s your private space, fully equipped with everything you need.
“The majority of the tenants are young professionals and students, looking to save money and (who) don’t require a lot of living space,” he said.
In an incentive for developers, NSW boarding houses are exempt from land tax if single occupants are residents for at least three months and are charged a maximum of $267 per week.
But many of these boarding house rooms are being offered at sometimes double the price, as investors find it more lucrative to forgo the tax break so they can charge occupants more, particularly in areas of high demand from international students.
It calls into question the effectiveness of state planning regulations that were designed to help low-income earners find affordable accommodation.
With house prices in the Sydney and Melbourne expected to surge another 10 per cent in 2020 and home ownership in Australia falling from 70 per cent to 66 per cent of households in the last 30 years, the growing cohort of renters is also attracting interest at an institutional scale.
Large offshore groups like Singaporean sovereign investor GIC, Dutch pension giant APG and private equity group Blackstone are all backing build-to-rent projects in Australia targeting young professionals.
US build-to-rent group Greystar earlier this month announced a $400 million mixed-use precinct in South Yarra comprising 500 build-to-rent apartments targeting young professionals.
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