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2010/2011 Review & Outlook
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37 Alexander Street, London W2 5NU. Telephone: +(44) 020 7243 8880Web site: www.servicedapartmentsolutions.com Facsimile: +(44) 020 7243 8881
Similar to most debt driven industries there was a very apparent, continued shortage of senior debt in the market place during 2010 and vital development finance from financial institutions was unheard of. This has constrained new developments of all real estate including serviced apartments, thus creating a huge lack of new stock, resulting in an increase in occupancy levels and rates as demand continued to increase. This further increase in occupancy levels and the ability to increase average daily rates has ensured that serviced apartments are delivering greater returns and hence yields to operators, owners and investors than ever before.
Over the past 5 years we have seen the serviced apartment industry go from strength to strength even through one of the toughest economic climates ever experienced. Although the economic crisis prompted changes in traveller preference from hotels to serviced apartments, the global economic situation has led the serviced apartment industry to face certain hurdles en route to rapid expansion. These barriers have been mainly due to the low supply of new development stock and the difficulties in obtaining serviced apartment licences in most major cities of the world.
Serviced Apartment Solutions (SAS) are The Specialist Consultants and Agents to the global serviced apartment industry and over the last decade have built and evolved the business to become the experts in this niche yet rapidly growing market.
Serviced Apartments have now become the true alternative to the conventional hotel; providing accommodation for both the leisure and corporate market without the often unnecessary extra services and cost implications found in a full service hotel. Serviced Apartments are also seen to be a great alternative to the traditional long term rental market providing a great degree of flexibility and increased level of services such as cleaning and all inclusive billing.
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37 Alexander Street, London W2 5NU. Telephone: +(44) 020 7243 8880Web site: www.servicedapartmentsolutions.com Facsimile: +(44) 020 7243 8881
The scarcity of debt in the market place coupled with the incredibly stringent conditions and criteria for borrowing has made senior debt for acquisitions of real estate harder than ever to secure. Many of the key financial institutions have always struggled with understanding serviced apartments and where it fits within their debt profile, becoming ever more acute in the last 18 months. There remain, however, a handful of our partners that can see the huge potential in this alternative real estate use and are starting to demonstrate a real appetite for serviced apartments in the key European cities with special emphasis on London.
London is still a global financial centre and although we observed the serviced apartment market bottom towards the middle of 2009, it has made a rapid recovery ever since. In 2010 average occupancy levels hit a record high of circa 88% across the spectrum of serviced apartment offerings. With such high occupancy levels, operators were able to increase rates by over 12% and are desperately looking to accommodate this further growth in demand through expansion.
Both small and large serviced apartment operators have looked to increase their portfolio of stock in London by either taking long leases, Assured Shorthold Tenancies or simply operational and management agreements with owners. These options are most common as they do not require any debt and will give the operator favourable and flexible terms dependent on how the market matures.
An operator that operates a residential (C3 use class) building/units and are therefore not officially classed as serviced apartments, short term accommodation or hotel (C1 use class) with a license to be let for less than 90 days are actually operating illegally and running the risk of being enforced with penalties and eventually possible closure by the local council/planners.
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London has now over 6,600 serviced apartment units of various levels of service but still only represents 6% of the hotel supply; coupled with the knowledge that the Mayor of London's Office, London Tourist Office and The London Chamber of Commerce suggesting London requires more short term accommodation, implying that there is a significant and exciting opportunity for serviced apartment growth.
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37 Alexander Street, London W2 5NU. Telephone: +(44) 020 7243 8880Web site: www.servicedapartmentsolutions.com Facsimile: +(44) 020 7243 8881
It is important to note that in the last two years there have not been any operators able to build and deliver a new operation within central London, once again due to the debt market constraints discussed earlier and the strict planning situation surrounding serviced apartments/apart hotels and short term accommodation within London.
Leased apartments with services have become another product which serviced apartment and hotel operators have started to include within their offering. These apartments often known as 'residences' are seen to be residential units that can be rented for a minimum of 3 months but unlike a standard rental property the rent includes utilities, rates and services such as a weekly clean and internet. It has become increasingly common for businesses with continuous requirements for short term accommodation to take such units for 6 months or longer and assign to employees on a week by week basis.
With more and more travellers from Asia travelling locally and cross continent, it is very clear that the serviced apartment operators must expand accordingly and provide the services expected by the often sophisticated and complex culture of their new clientele. Serviced apartment and hotel operators in Europe for example must ensure that they are marketing towards and prepared for the new Asian traveller who may require their language to be spoken, a good understanding of dietary expectations and possibly even units to be equipped with services that they are used to at home i.e. home country television channels.
From discussions with operators based in Asia, we predict that with the certain explosion of travellers the key operators are looking to establish operations in the major cities of the world and especially Europe to cater solely for the new Asian traveller; where prices/currency, brochures, staff and services will only target their home country/region client. We have already seen the Middle East operators creating a similar product in Paris and London, ensuring that religious and cultural differences are considered in all aspects.
As London is seen to be the key foothold into the European market and despite the planning barrier to entry, most developing operators must start their European expansion from London.
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2011 and 2012 will see a further growth in the serviced apartment industry globally and we have already seen the incredible number of planned serviced apartment developments in Europe, Asia and the Middle East.
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37 Alexander Street, London W2 5NU. Telephone: +(44) 020 7243 8880Web site: www.servicedapartmentsolutions.com Facsimile: +(44) 020 7243 8881
Similarly to what we have seen in the evolution of the Hotel market, we believe that over the next 12 months, serviced apartment operators will start to not only concentrate on developing and operating large economical 50+ unit buildings but actually create boutique serviced apartment brands and operations where the clientele feels more at home and less in a hotel environment with more bespoke services on offer. This will typically be at the 5 star level of properties and locations where clientele look to enjoy a very personalised and private stay.
As the major cities of the world become ever more transient and international we will see the further rapid growth residences and leased apartments with services (mentioned above). This product will appeal to new residents to a city, single occupants, professionals looking for a city pied a terre, divorcees and almost anyone wanting to live in their own apartment without the timely process of contracts/leases, deposits prior to moving in and the complications of paying individual utility bills, rates and cleaning during one's stay. Many of these operations are already and planned to be within hotels/apart hotels where residents can share many of the hotel/apart hotel facilities i.e. gym and concierge. This offering will definitely incur a premium rent but this is seen to be a small price to pay for such easy living.
The development in understanding and demand for serviced apartments in the UK during 2011 and 2012 will soar as Britain and especially as London emerges fully out of the current economic climate and prepares for an exciting 2012 Olympics and economic growth going forward. With the scarcity and lack of new serviced apartment stock we predict an average occupancy level of circa 90% in London during 2011 and early 2012 with a further increase in occupancy and rates in the middle of 2012, hitting an historic high of 95+% occupancy across all serviced apartment offerings.
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It is believed that the debt markets will open for business again during Q2 of 2011 and will look to start lending to the serviced apartment industry for both acquisition and development. This availability of acquisition funds is vital for buyers looking to grow further in the serviced apartment industry and owner/operators looking to cash out of a particular building at a time in the market where stock is so low. Development funding will not build serviced apartment units immediately and therefore we predict the trickle of new stock towards Q4 of 2012.
37 Alexander Street, London W2 5NU. Telephone: +(44) 020 7243 8880Web site: www.servicedapartmentsolutions.com Facsimile: +(44) 020 7243 8881
It is suggested that London currently has a requirement and demand for over 20,000 serviced apartment units and without new build stock, operators are looking to convert buildings with other use classes such as offices or even car parks. Coincidently, developers of mixed use sites who are struggling to sell/lease parts of their plan are also considering the alternative serviced apartment exit route which has been proven to be profitable versus the traditional 'Buy to let'.
The UK and London was seen to have been good value in 2010 with very favourable exchange rates and thus buying power for the Far East, Middle East, Europe and America buyers within the real estate market. Unfortunately there was little stock to be traded and we believe that only towards Q3 of 2011 will one see more key assets coming to market.
With the clear increase in interest, understanding and thus demand for serviced apartments over the last 2 years and going forward, we will see an even larger demand for buildings/sites/operations from the international hotel operators who have realized that it is a product that they need to be including on a grander scale within their international corpo-rate and leisure offering. Once again the lack of supply for units will be an important barrier to entry which we believe will lead to possible consolidation and the small local operators being acquired. This important market shake up in the next 24 months will likely leave 3 to 5 key operators with 90% of the market share.
SAS are the full service expert consultants and agents that specialise solely in serviced apartments. With our strong partnerships and relationships with financial institutions, inves-tors, world renowned developers and serviced apartment/apart hotel operators, we look forward to ensuring that the correct team of experts can assist you.
www.servicedapartmentsolutions.comE: [email protected]: +44 (0)20 243 8880
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We at SAS are very encouraged and excited by the evolution of the global serviced apartment industry and would love to hear your thoughts on the last 18 months and predictions for the next. Please do not hesitate to post a comment to us on Twitter @sasconsultants or send an email to us to [email protected]
