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Is 2016 the year of serviced accommodation property investing?

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We're starting to see a lot of news stories and posts on social media about investing into serviced accommodation and being that we're an investor into the strategy we decided to share with you some of the research we conducted before recently purchasing a property that we're converting into 22 self-contained studio apartments that will be operated institutionally efficient under a restrictive management agreement. 

Research Summary:

  • Currently, UK companies are reporting an ‘86% increase in the use of serviced apartments’
  • Serviced apartments will see a 122.3% uplift in the number of UK units over the next two years
  • Industry experts believe the sector will come of age over the next 12 months, both in primary and regional cities

Taking into account the above, 2016 could be a hugely significant year for serviced apartment investment in the UK. A recent report from Savills and the Association of Serviced Apartment Providers (ASAP) found that national operators are set to increase their number of operative units by as much as 122.3% between 2016 and 2017, with the sector as a whole set to grow by 8.4%.

“The service apartment industry is on the cusp of big things, with an exciting future ahead,” according to Mark Harris of the Travel Intelligence Network. He cited the unrelenting appetite for corporate accommodation as the key driver of this growth, with UK businesses registering an 86% increase in the use of serviced apartments in recent years.

But it’s the emergence of serviced apartment developments in regional cities and towns that’s excited many in the industry. “Without doubt, this expansion all across the UK is an exciting milestone for the industry. It’s fantastic to see openings in 2016 in secondary cities like York and Reading, as well as continuing growth in primary cities such as London and Birmingham,” declared John Wagner, Director of Cycas Hospitality.

Another of those regional cities is Norwich along with popular Norfolk towns such as Wymondham where the increased demand for short-term lets has created a clear opportunity for serviced apartment investment. Occupancy rates at hotels and existing serviced apartments hit record levels in August 2015, as supply continues to become strained under growing demand.

The great thing about serviced accommodation as a property investing strategy is that you can do it in houses, bungalows, cottages and apartments. The key is to make the property a home from home as that's what is driving more interest in the sector from holiday makers and professionals looking for short term accommodation. Whether you've got a two-bed apartment or a five-bedroom house simply check the demand for the area your property is located by reviewing websites such as booking.com and trip advisor to see what's available for short term stays. Then assess the room rate per night versus the availability of each property to see if both the style of the property (it's look, feel & furnishings) and the rate are getting bookings. Such an assessment then allows you to see whether the model could work in that particular area. Beware though, it may be that some properties don't have that many bookings, that doesn't mean there isn't demand, it could mean the property is catered correctly to the demand for that area so it's important you consider all possibilities before making a decision. Remember the best businesses are usually borne off the back of someone else's - think of Facebook and My Space as an example. 

In terms of the investing return, renting out a two-bedroomed apartment to holiday makers can produce an eye-catching income of between GBP 12,000 and GBP 15,000 per annum. Larger properties can average up to £30,000 a year gross. Desirable tax breaks add to the appeal of serviced accommodation ownership which is attractive at a time when the Government is slashing tax reliefs associated with other property investments, such as buy-to-let. 

If you operate under the “furnished holiday letting” rules, you can offset all expenses including full mortgage interest against the rental income. This compares with the scaling back of tax relief on buy-to-let from 2017. For example, if you were buying a cottage for GBP 350,000 with a 75% mortgage fixed for two years at 2.85%, a landlord in the 40% tax bracket could claim GBP 2,992.50 in tax relief, while from 2017 a buy-to-let landlord’s tax relief will be capped at GBP 1,496.25 – a difference of nearly GBP 1,500 - which would pay for a lovely summer holiday with your family.

Running a serviced accommodation business is treated by HMRC in the same way as any trading business, so losses can be carried forward and offset against future profits. Furnished serviced accommodation also qualifies for entrepreneurs’ relief, cutting any potential capital gains tax take to 10%. Otherwise any taxable gain will be hit by an 18% deduction below the higher rate threshold of 28%. In addition if you have been actively involved in the operation of the serviced accommodation business by, for example, providing a laundry service, it may be possible to get business property tax relief. To qualify for furnished serviced accommodation (holiday-let) tax treatment, the property must be available for letting for 210 days a year and actually let for 105 of those days. If you have more than one property, occupancy can be averaged to qualify. Please note, in no way are we offering you tax advice, we recommend you speak to your own qualified property tax accountant for confirmation on your tax relief entitlements, if any.  

In terms of raising finance to purchase serviced accommodation properties, very much like the commercial mortgage market steer clear of the 'high street' and 'mainstream' lenders - they'll gladly take both an application and survey fee off you and then tell you at a later date they can't approve a mortgage. There's only a handful of lenders that specialize in serviced accommodation (holiday let) mortgages and even then, some lend on expected rental yield (based on an established history) and others on the value of the property. When it comes to the later, the lenders apply a credit score using your salary and will offer maximum loans of four times joint earnings of applicants. It's best to speak to a finance broker that has experience in this sector to source the best mortgage for you based on your circumstances. 

It is always possible to raise finance without mortgaging the holiday home itself. You can take out a mortgage on your primary residence, if you have one that's debt free. Perhaps you don't need to purchase another property and you can convert part of your existing primary residence to generate an income from serviced accommodation? Outside of the box thinking has seen some holiday home owners restore derelict outbuildings in their gardens to rent out as serviced accommodation for professional and holiday lets which has seen incomes of GBP 15,000+ to help pay off their primary residence mortgage! 

As is always the case, there's many ways to skin a cat when it comes to property. If you're thinking about investing in Serviced Accommodation and would like to learn more, we'd love to hear from you. Please add a comment below or get in touch via our contact page

Thanks for reading, 

The Estateducation Team. 

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