A wealth of potential destinations, increased professionalism and contract ingenuity will increase the popularity of serviced apartments, and investors are beginning to notice.
LONDON—Due to industry consolidation, branding and profit goals, the number of traditional hoteliers leveraging their real estate assets by moving into the European serviced apartments sector is increasing, sources said.
Panelists who participated in the “Owners and operators” session at the Serviced Apartment Summit Europe in July said the sector is gaining strength, but one remaining obstacle is the product is still difficult to explain to potential investors.
In general, the European serviced apartment segment is still a ways behind its United States’ counterpart, according to Asli Kutlucan, director of hotel development at Cycas Hospitality. But European banks are opening their checkbooks to close the gap.
Nick Turner, managing director at Bespoke Hotels International—which recently acquired a minority stake in aparthotel brand Staying Cool—said investors will become more comfortable with the sector when branding is more common and its landscape is not so fragmented.
“Serviced apartments today remind me of the mainstream hotel industry 15 years ago,” Turner said. “It is a very important moment in this space.”
Andrew Shaw, associate VP of development for the U.K. and Ireland at InterContinental Hotels Group—which is familiar with serviced apartments with its Staybridge Suites extended-stay product—said the sector is attractive because of its immaturity as an asset class.
“The opportunity is now, while it is unrecognized,” Shaw said. “The returns are so strong.”
Other panelists agreed.
“It is a fragmented sector, so for most investors (serviced apartments come) under ‘alternative accommodation,’ but capital is interested as operational expenses are half the average (of all hotel sectors) and it is less vulnerable to economic change,” said Max Thorne, managing director at Jones Lang LaSalle’s Hotels & Hospitality Group.
“There also is great opportunity for professional management,” Turner added.
Some regions in Europe remain difficult to crack, though.
“Serviced apartments can prove they are secure products, but in Germany it is difficult to explain the concept that they are not boarding houses,” said Matthias Niemeyer, head of development of Germany at Toga Group, which operates serviced-apartment brands such as Adina and Medina. “Serviced apartments are as profitable as hotels, with an average stay of four nights in Germany. I am sure something that is to come is lower cap rates for the sector, too.”
Kutlucan said Cycas Hospitality’s ability to add increased value will lead to higher return, versus the additional leverage and scale likely from mergers-and-acquisitions activity. But she added she is open to inventive contract negotiation.
“Hybrid leases are becoming attractive to the sector,” Kutlucan said. “They contain a secured base rent for when times are bad, but for when times are good, a share of the profits. Though for some investors that arrangement would not be their funds’ model. Eventually we want to develop our own covenants.”
Panelists agreed that providers needed to be flexible with exactly what investors are looking for. Kutlucan and Shaw said that dual-branded products, which could perhaps include one traditional hotel asset with a serviced-apartment property, will also be attractive to investors.
“We’d look on that as one asset,” Kutlucan said, while Shaw added such an arrangement “gets more rooms on a site, and there is no cannibalization.”
Bespoke’s Turner said managed and franchised properties could also provide investors some additional comfort.
“Contracts can differ on where you are in the world, but overall we prefer if everyone puts in blood and tears to align interests,” Turner said.
Thorne said he believed M&A activity was coming in serviced apartments regardless if professional management increased.
“There are four or five players but 20 to 30 (small and medium enterprises),” Thorne said.
For serviced apartments to work in new regions, there doesn’t necessarily have to be a very strong corporate base, panelists said.
“We can go off pitch as long as there is some base, as serviced apartments do not need the visibility of hotels,” Shaw said. “Good transportation is another requirement, but again (the sector) can benefit from local values as you can be two or three blocks behind the main street.”
All in all, panelists said serviced apartments can blossom just about anywhere in the world.
“The sector is undeveloped,” Kutlucan said. “We also look at manufacturing areas, too, even in the (United Kingdom) where it does still exist.”
“The world is our oyster,” Turner said, “which is why we keep going east, to the Middle East, to Asia, destinations where there is an established, all-year hotel market.”