Tone Wheeler has been working on a range of boarding house projects across Sydney, developments that not only incorporate his practice Environa Studio’s sustainability nous, but which also herald the arrival of an exciting new asset class that is earning many self-funded retirees yields of 8-9 per cent.
Boarding houses involve small single or dual-occupancy dwellings in larger complexes that are offered on minimum three-month tenancy arrangements. In NSW, a boom in the market has been occurring, thanks in part to legislation introduced by the former NSW Labor government to improve housing diversity and affordability, and again in 2012 under the Boarding Houses Act.
The State Environmental Planning Policy (Affordable Rental Housing) 2009 has been encouraging a “new generation” of self-contained boarding houses, such as those Wheeler has been working on, which contain an ensuite bathroom, kitchenette and wardrobe with a bed and potentially a balcony or mezzanine, all within around 25 square metres.
According to Australian Bureau of Statistics data, NSW now accommodates more than a third of all boarding house residents in Australia, strongly concentrated within the City of Sydney and surrounding inner-city locations.
Traditionally, Wheeler says, boarding houses have had a bad reputation, characterised by old down-and-out men drinking on the steps outside. Now the demographics are changing. According to the Australian Housing and Urban Research Institute, new generation boarding houses are attracting key workers and young professionals. Wheeler adds shift workers, short-term secondments, singles, students, those needing emergency accommodation and even “dead beat dads” – divorced men who suddenly have to move out but still want to be near the kids.
Importantly, the projects Wheeler is working on (which range from around 20-40 units in each development) are being built with extremely high efficiency and comfort in mind. In these developments the tenants are not directly paying for energy or water bills, which explains the sustainability drive.
This is a risk-reduction strategy for the owners to protect from bill shocks, but more importantly it also minimises tenant turnover – thanks to increased comfort – and reduces maintenance and repairs, thanks to Wheeler’s sustainability approach, which prioritises what he calls the “three L’s” – long life, loose fit and low impact.
One of Wheeler’s completed project is in the inner-city suburb of Annandale. Wheeler says the development has tried to get energy use so low there is practically nothing a tenant could do to cause a high bill.
The project has been built with high thermal mass, is heavily insulated, mechanically ventilated with fresh air, uses LED lighting, has double-glazed windows and most apartments – except some that face North in one building – have no airconditioning.
The low energy and water bill sell, however, has always been a difficult one, Wheeler says, which is why commercial offices have tended to focus on green buildings as means of improving productivity, absenteeism and health. It is similar for the boarding house market too, where most of the overheads are spent on management.
Sustainability here has been sold as lowered long-term costs around maintenance and management. Having LED lights, concrete walls and roofing, and low-VOC linoleum flooring means lower repair costs. And having a stable, comfortable indoor environment, natural light and soundproofing means less tenant turnover, which translates into hugely reduced costs for the owners. It’s a great crossover of environmental and economic sustainability.
“Essentially what we’re selling is the idea of a building that is easy to maintain,” Wheeler says.
He believes sustainability hasn’t always prioritised low maintenance and longevity, though, predicting that the green “glamour homes” of the past 10 years will soon have to be “pulled apart and redone”.
The emergence of a new asset class
Wheeler says Australia has traditionally had a very monocultural approach to housing investment, which makes the boarding house phenomenon particularly exciting.
Traditionally banks have provided loans to individuals for a property on individual land. More recently lending has gone to developers as a construction loan, which is then paid back through the sale of individual units. The difference with boarding houses, compared to a typical apartment complex investment, is that the boarding house is being built as a business, rather than as property to be on-sold for capital gain.
The attraction with boarding houses is the long-term return from rent that can be commanded, which Wheeler estimates is in the 8-9 per cent ballpark, compared with the typical rental housing return of 5-6 per cent – an “incredibly good return on investment” attracting a lot of interest, including from self-managed super funds.
“A huge number of [boarding houses] are being planned and built,” he says, “and a lot are being built with super money.
“A lot of investors haven’t told anyone because they’ve found a good investment and they don’t want others to know.”
The banks have been slow to see the benefits in the boarding house market, which is why private investors have stepped in to fill the gap, Wheeler says.
He sees the banks as the biggest handbrakes on development in the country – and particularly green development.
“Banks are the biggest drag on the Australian economy because they are cautious and avaricious,” he says.
Wheeler says banks have typically had great difficulty investing in things like hotels and boarding houses, which never attract the 70-80 per cent of lending a traditional apartment development would command, for instance. Instead banks typically lend only 50-60 per cent of the required funds for these project, and with a higher interest rate due to perceived risks, which Wheeler says are “nonsense”.
The boarding house model is much more attractive than motels or a backpackers, he says, where there are hugely transient populations with short-term stays of a day to two weeks. The minimum stay in a boarding house is three months, and occupancy rates are typically upwards of 95 per cent – “irrespective of where they are or the price point”.
On that point the boarding houses are going into areas in which it would be a tough sell for traditional residential apartments. For example the Annnadale development is right on the heavily congested Parramatta Road – “a great location for boarding houses, and terrible for residential”, Wheeler says.
The attraction for tenants, Wheeler says, is the closeness to amenities like Royal Prince Alfred Hospital, the University of Sydney, cafes, the city centre and public transport links.
The SEPPAH allows construction of boarding houses in General Residential; Medium Density Residential and High Density Residential zones as well as Neighbourhood Centre, Local Centre and Mixed Use zones. They can even be approved in R2 Low Density Residential zones, provided they are close to public transport. And with increased densification on many city governments’ agendas, boarding houses could become a smart low-cost solution for key workers that desperately need to get closer to the city and they jobs.