Key Workers – An opportunity for investment?

We are always looking at opportunities for our clients in the market.  Currently flying below the radar are “Key Worker” apartments.

Key workers, or essential workers, are people whose occupations are considered essential to the functioning of cities, but who are typically on fixed, low to moderate wages. The Government, at all levels are constantly tinkering on how to ensure such workers remain in proximity to the city.

 NSW affordable housing laws as are currently encouraging developers to provide essential worker accommodation via the key housing scheme.  The scheme is designed to provide lower rental accommodation for workers such as nurses, teachers and police. But what is the benefit to the developer for doing so?

Developers gain extra floor space in return for setting aside units that are leased at a discounted rent.  Rents are set based on a combination of market prices and eligibility criteria anywhere from 30% to 50% of gross income.  But why would you consider this as an investment?

These units are on-sold as an investment at a reduced price (due to the discounted rent).  The caveat is that the apartments must be leased ‘affordably’ by their owners for a minimum of 10 years. Thereafter they are treated as a normal property. We are seeing key worker apartments pop up in excellent locations such as Glebe, Willoughby and more recently Bondi. 

When we look at:

1)       The increased security of cash flow (as the tenant can afford the rent therefore lower risk of downtime and the tenants are usually in a government secure job);

2)      Income yield (Higher as the discounted sale prices offer a higher yield even with the lower rent); and

3)      The reversion to market value in year 10.

Such investment looks compelling. We tested our thoughts by analysing a recently completed key worker apartment at AMARI in Bondi.

The block has one bedroom apartments for sale at $880,000 (including a car space).  Considering comparable projects in the area this is estimated to be at a discount in the order of 30%.

Rental returns for one bedroom units in Bondi are in the order of 3.5% to 3.9% (real estate.com.au, ABS). Such returns place the weekly rent at $590 to $660 per week (or $30,680 to $34,320 pa), well within the bounds of eligibility criteria for essential workers.

Perhaps the most staggering factor is the reversion. Long term (10 year) compound value growth of one bedroom apartments in Bondi is 6.42% (real estate.com.au). The estimated value of the apartment grows not to $1,640,000 (applying the compound rate for 10 years) but to $2,130,000, as the property reverts from being registered as an essential workers apartment.  This reflects a growth rate of 10.3% pa across a ten year period and outperformance of the market by 3.9%.

The total Internal Rate of Return for the property over a ten year investment horizon is in the order of 11.5%  to 12% pa.  Certainly attractive !

Perhaps, worryingly, the current scheme is under review by the Government and therefore this window may not be open long.

We have access to a select number of apartments at AMARI.  If you are interested in discussing further or wish to inspect the apartments please email me john@willsproperty.com.au

Kind regards,

John Wills  FAPI
M            +61 467 44 38 38
E              john@willsproperty.com.au

Our assessment is indicative only and based on certain available information, and may not represent actual market value. It is provided as general information only, current as at the time of issuance and does not constitute advice, whether in relation to valuation or otherwise.

This report is NOT a valuation and may not be relied on as such. For valuation advice, we recommend that you seek an independent valuation from a member registered with the Australian Property Institute.

This article has been prepared by or on behalf of Wills Property Pty Ltd (Wills Property) solely for general information purposes and without considering your individual objectives, financial situation or needs. You should consider its appropriateness in light of your circumstances and consider seeking independent legal, financial and/or other professional advice relevant to your individual needs before making a decision based on the information contained herein.

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