Housing affordability especially in high price and population growth suburbs like Sydney’s Inner City and Inner West has become a serious and growing problem. This in turn has prompted our local, state and federal governments to bring changes to planning and development laws allowing private investors and non-for-profit housing organizations the opportunity for developing “modern micro apartments” or what is now known as new generation boarding house development.

Introduced on 31 July 2009, the state government’s affordable housing provisions (AHSEPP) included incentives that permitted a developer to build and lease smaller, and therefore cheaper micro apartments in buildings of a larger scale than otherwise permitted in low-density areas and the concept of new age boarding houses had risen.

These new generation boarding houses offer self-contained furnished studios from 12m²-25m² with all utilities included in the rent or occupancy fee to people like young professionals, middle-aged people, divorcees and retired people who are squeezed out of the housing market because of the affordability gap between home ownership and their incomes.

One such example is Annandale’s McCarthy Maisonettes on Parramatta Road, which was approved by Leichhardt Council as a registered boarding house with 24 self-contained rooms in 2012. This completed building offers modern architect designed luxury furnished studio apartments from $355 a week all utility expenses included.

A growing section of Australia’s population don’t live in nuclear families, and the housing stock is shifting alongside this. High-density built forms are part of this shift. But there is need for more diverse choices for people who want to continue to enjoy the amenity of suburban neighbourhoods and keep their existing social networks there. These people aren’t looking for family houses and often can’t afford them. It is not in the interests of the landlord or tenant to see the neighborhood’s character tarnished, nor to have a business model that relies on a diminishing pool of prospective tenants.

There are often community concerns about anti-social behavior with boarding house developments, however this is mainly an issue of the perception of the traditional boarding house occupants who are coming from very low socia economic backgrounds and at times have physical or mental impairment that can lead to substance abuse. However, research conducted into boarding houses both established and new and operators/owners of these types of accommodation has indicated very low issues among tenants living inside these communities and having very little impact on surrounding neighbors “quiet and peaceful enjoyment of their premises”.

New generation boarding house developments are a very different product. The rooms are typically self-contained with kitchenette and ensuite. They are ecofriendly built, come with Wi-Fi and other state of the art design and interiors. They are now also subject to formal occupancy agreements that offer tenants (and landlords) more security and certainty. Residential Tenancy Agreements can also be signed and is the preferred choice for property investors adding to a better layer of protection, larger bonds and in the case of tenancy breaches more clarity around what action can be taken. Standard agreements are usually 6-12 months in length, rather than short term (3-6 months) and are generally renewed by the occupants if both landlord and tenant are happy with the tenure. Occupancy rates are very high, usually well over 90 per cent.

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 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 is in the 8-9 per cent net rental return compared with the typical rental housing return of 3-4 per cent. New gen boarding houses are attracting a lot of interest, including those mum and dads running self-managed super funds.

One of the big questions that property investors will face is how and who is going to manage these tenancies and the general day to day operations of a multi-studio room development? Many property managers will simply refuse to deal with multiple occupancy properties, and those that do will charge up to double and a half of the average for the area the property is in. Again there is usually double the workload involved in managing multi room tenancies. As a result, some landlords who operate multiple occupancy properties may end up managing the properties themselves. This brings with it all the downsides that come with DIY property management, such as having to source and interview tenants, deal with day-to-day tenant management, attend to maintenance and implement rent increases and lease renewals.

There can be conflicts of personality in the processes and keeping at arm’s length is not such a bad thing. But a general real estate property manager is not always the answer as this type of management requires great technical skill and knowledge. Appointing a very qualified property manager is possible but there is a limited pool of these as new gen boarding houses are relatively a new dwelling type and limited in numbers. A ‘caretaker’ can be appointed to live onsite (usually a requirement as part of a D.A. for 20+ rooms), at a lower rent and can undertake basic grounds keeping, cleaning and minor maintenance. It’s a good solution as it means you’ve got someone on hand in the property to look after the basics however you’ve still got to deal with the overall property and tenancy management as well as the financial management and reporting that a caretaker will simply not be able to deliver.

There are estimated to be nearly 800 DAs for boarding houses currently under consideration at various councils within NSW. The old boarding houses used as half way houses for so called “society drop-outs” with shared services but these new gen types are a complete opposite which are a good alternative to a share accommodation premises and offers privacy and safety to the occupant. Savvy investors are buying or developing them for their high yield and low risk and developers often like to hold on to them for the annuity.