Investing in Serviced Apartments

K Dinesh and his fiancé are a typical young couple -- both are urban professionals looking for a starter home that would fit their lifestyle. After weighing their options, they decided on a unit in the Millennium Residence Smart Serviced Apartments, located on a 4-acre plot in Section 14 in Petaling Jaya.

The couple is an example of the demographic make-up of purchasers of serviced apartments in the country. But this was not the scenario when serviced apartments were first introduced in the late 1980s. Historically, says Malathi Thevendran (pix, right), managing director of Jones Lang Wootton Sdn Bhd, serviced apartments were built as an alternative to hotels.

Since they featured more space, these apartments were preferred by long-term staying guests. One of the first serviced apartment developments, completed in 1988, was the 242-room Micasa Serviced Suites by Tan & Tan Developments Bhd, now owned by IGB Corp Bhd.

These hotel-type serviced apartments, says Malathi, are generally retained by the developers, while operators are engaged to provide services. "They are mainly occupied by expatriates or out-of-state locals that come to the city for work on short-term assignments."

Liza Ong, marketing communications manager for Micasa Service Suites, confirms this. "The majority of guests in our all-suites hotel are from the corporate sector, with 20% staying for longer than one month." With an average daily room rate of RM210.

Changing clientele

These days, however, serviced apartments that are mushrooming in the Klang Valley have attracted a different crowd -- individual investors and home buyers. These serviced apartments are also referred to as serviced residences, condos or suites. According to a CH Williams Talhar and Wong property report last year, 2004 marked the launch of some 18 serviced apartment developments, offering a total of almost 7,400 units. These are expected to be completed in stages through 2008.

What is a serviced apartment, anyway? According to Luxor Properties Sdn Bhd, the developer of Millennium Residence, it refers to apartments built on commercial land, which features some form of service like housekeeping or concierge. "It is usually let out on a short- or long-term basis. However, it is not uncommon for owners to occupy these units themselves," says Luxor Properties' general manager Yong Wee Cheok (pix, left).

Charmaine Lim (pix, right), director of Titijaya Group, holds a similar view. Most serviced apartments, she says, have evolved from their original incarnation as places with hotel-like services into condo-like developments. Buyers now plan to reside in them. "Services today are mainly just housekeeping and laundry, and not full services," she adds. Titijaya is building two such developments, e-tiara and tiaraville, both in Subang Jaya.

Malathi, however, cautions that there is no clear definition by the authorities on serviced apartments. "Each developer seems to have its own definition," she points out.

"What makes it different from a regular apartment or condo is the fact that serviced apartments are built on commercial titles instead of residential land. As the costs for commercial land are high, serviced apartment units are typically smaller and priced at between RM300 and RM550 psf. In some instances, the prices have been higher, depending on the location and reputation of the developer," adds Malathi. This is certainly true -- the price for one of the 607 units at The Marc in Jalan Pinang, which is in the KLCC area, has been quoted at RM909 psf in the WTW Property Report.

Two factors have propelled the boom in this property type. Malathi opines that owners of commercial plots in the city centre have shifted their interest to developing serviced apartments due to the oversupply of office space. Luxor Properties' Yong confirms this, saying that the shift towards serviced apartments only happened after the 1997/98 Asian financial crisis, when demand for office and retail space declined sharply.

Siders Sittampalam (pix, left), a consultant with PPC International, figures that serviced apartments allow developers to navigate around the red tape that surrounds the strict guidelines of the Housing Developers (Control & Licensing) Act 1966 (HDA). Since serviced apartments are not governed by HDA rules, developers do not have to comply and thus save time and money. "Developers can start selling serviced apartments upon getting their building plans approved. They don't have to wait for the sale and advertising permits and pay a substantial deposit for a housing developer's licence," says Siders.

Growing allure

Building on commercial land does not only benefit the developer, contends Low Gay Teck (pix, right), managing director of Malaysia Land Properties Sdn Bhd (Mayland). "Buyers also enjoy owning properties that have higher rental values due to the fact that these provide more services like housekeeping, laundry, and food and beverage. Some also provide broadband Internet access, a service that may not be available in normal residential properties." Mayland is the developer of 3,183 units of serviced apartments. Two of its developments have been completed -- the 522-unit Mayfair & Dorchester Serviced Apartments in Sri Hartamas and the 1,080-unit Prima Regency in Johor.

For buyers, serviced apartments have an allure of their own. "Serviced apartments are designed to house units with smaller built-up, and to cater to a younger buying group. The bulk of the supply comes in the form of 1- to 2-bedroom apartments. Hence, such apartments would be ideal for young urban professionals, singles or married couples with no children or those with young children," says Yong.

"Moreover, the yields generated from some of the more popular developments are in the range of 6% to 9%," says Malathi.

Siders explains that serviced apartments are targeted at a specific segment of the market, particularly those who are looking to live in the city. "Residents will enjoy proximity to the central business district, as well as have access to a good public transport network and amenities."

Lim says Titijaya's e-tiara and tiaraville serviced apartments have attracted two different demographics -- young professionals who are single or with small families, and retirees. "Our buyer profile includes retirees who are attracted by the conveniences offered by our serviced apartments -- easy access to transportation, housekeeping and laundry services and security. In fact, we are also providing an in-house healthcare centre."

A Bangkok-based purchaser, Lau Tian Liang, agrees; he is among the purchasers at e-tiara. "I had been looking around for an investment property and this seemed to be a good one. It is also something that I do not mind staying in." He is fully aware of the risks. "I understood `serviced apartments' were not covered by the HDA, but I took the chances and put my faith in the developer."

Investment vehicle

How does a serviced apartment rate as an investment vehicle? "A recent survey by PPC International indicates that there are 3,867 units of services apartment in various stages of development, including those on the drawing board in the vicinity of KLCC," says Siders.

With such figures, can the rental market absorb the number of units coming onstream? "This would lead to a question of whether in an oversupply situation, will the market hold the yields expected from the investment when they are not at a par with market expectations," he adds. In the long run, Siders predicts that the capital appreciation for serviced apartments will thin or even halt.

Serviced apartments might just appreciate in values, however. Malathi cites some serviced apartments launched in 2000 and located in prime locations, when the market was recovering from the late 1990s slump. "These developments are experiencing capital appreciation of about 4% to 6% per annum." says Malathi. "In terms of net yield, it ranges from 6% to 9% for those located in prime locations and are well-supported by amenities."

Chang Kim Loong (pix, right), secretary-general of the National House Buyers Association (HBA), strongly cautions buyers to consider all aspects of serviced apartments before purchasing. Potential buyers should review all the documents, he says, from the marketing brochures, sale and purchase (S&P) agreement, deed of mutual covenant and lease agreement, to the termination terms before committing. This is because such purchases are not governed by HDA. Besides the normal pitfalls of buying off-plans, buyers will have to consider the commercial rates on taxes and utilities. For investors, they have to consider the ease of getting tenants at the expiry of lease agreements.

"The Act is actually a social legislation to protect buyers in their dealings with housing developers. Any proposed development that does not come under the definition of `housing accommodation' in the Act is outside the legislative ambit. Therefore, no protection is accorded for buyers." explains Chang.

In fact, Chang reminds buyers that even the Minister of Housing and Local Government, Datuk Seri Ong Ka Ting, has publicly declared that there is a loophole in the law and has repeatedly warned buyers to be aware that "serviced apartments" are not covered under his ministry.

"Datuk Seri Ong has also announced that laws would be changed to cover serviced apartments but no announcement has been made on when it will be implemented," adds Chang.



Buyer beware

Malathi concurs with Chang. Since buyers are not protected under the HDA, they should be extra cautious. "Buyers must read the agreement and understand the services that will be included in the operations of the building before signing the agreement," she says.

While Mayland's Low assures that "the purchaser's interest is clearly protected in the S&P agree ment", purchasing a property that is outside the jurisdiction of the HDA has its disadvantages, warns Siders. If something goes wrong, the only legal recourse against the developer is the contractual agreement between both parties as the properties are not regulated by the HDA. This is why, says Low, purchasers should look at the track record of developers and their experience in construction and management of hotels and serviced apartments.

Malathi reminds buyers that the success of a serviced apartment is dependent on the operations manager. "If there isn't a good manager on site, the building can become `run-down' [due to the nature of the short-term lets] and therefore, the value of the property goes down," she says.

It is also important, Malathi adds, that the right tenants or occupiers are selected in order to sustain the quality or brand image of the development. "In some instances, exclusive agents are appointed to manage and select the occupiers."

Yong admits that as serviced apartments are not governed by the HDA, it is not mandatory for such developments to comply with the provisions of the Act. However, some developers, like Luxor Properties, draft their S&P agreements based on the Act.

In the case of Millennium Place, the progress payment is upon completion of the work done, although the stage of completion does not fully follow the schedule stipulated in the HDA. For utilities, buyers will pay residential, not commercial, rates. "As long as meters are applied for individually by the purchasers under the residential category, then it'll be subjected to the domestic tariff. For water charges, Syabas [Syarikat Bekalan Air Selangor Sdn Bhd] has streamlined both commercial or domestic rates to a single rate, with the only exception given to low-cost housing."

Lim of Titijaya says buyers of e-tiara and tiaraville will also enjoy residential tariffs. She adds that these days, many serviced apartments have obtained approval so that the buyers are charged residential rates for services. "It is quite easy to obtain residential rates as long as it is proven that it will be for residential usage, instead of looking at the land title of serviced apartments."

Titijaya has gone one step further. "As we are a serious long-term developer, we have opened a project account with our bridging loan financier. This was before Bank Negara set this as a guideline for developers building serviced apartments," adds Lim. The project account is similar to an HDA account.

What is clear, then, is for home buyers to be aware of the benefits offered by serviced apartments and weigh them against potential risks. While buying a serviced apartment has its share of risk, Lau had this to say about his serviced apartment purchase. "No investment is risk-free."