In the last few years the serviced apartments sector within the hospitality market has grown more than any other segment of short-term accommodation within Europe. Consumers are now travelling more often for both leisure and business activities. This results for certain accommodation requirements, as guests are looking for more space, flexibility- essentially a home away from home familiarity.
Who is attracted to the serviced apartments sector?
Due to the increased demand for short-lets and Serviced apartment accommodation the profitability rate has increased. Due to staffing costs being substantially lower than hotels this incurs savings to be made by the nonexistence of say a restaurant or café within the premises. Up keeping costs are also lower due to weekly linen changes rather than daily. All these combinations create the element of lower fixed costs, permitting more revenue to be generated. This business model is an attractive avenue for lucrative profit opportunities, rather than a norm hotel.
Key factors to consider when getting involved in Serviced Apartments operations are the location and quality of the property in question. For you to meet potential guest demands the serviced apartments must be situated in superior locations, near to transport links and business districts. Ideally serviced apartments within London zones 1 and 2 will perform extremely well due to central and prime location.
Private equity investors have joined the market by injecting capital into their selected independent brands directly. This directly has cause new independent brands to operate and own their assets, aiding the expansion of the brand awareness and profile via site acquisitions in key cities such as London. Furthermore recognised investors have observed the expansion of the sector, but are still hesitant to invest. Recognised investors have refrained from entering the market due to a lack of brand awareness or unproven track records and a lack of knowledge in operating within the Serviced Apartments Sector.
Leaseback and sales structures
This structure enables the investor to acquire the freehold/long leasehold title to the asset in question, consequently this will grant a fixed term lease- for example 20/25 years. Of course you need to consider the terms of the lease, the operator may decide to charge the lease to a third party creditor for the forethought of extra operating funding.
Subsequently the investor is provided with security as a legal title to the asset that has been obtained from the beginning. A regular and consistent income stream over a fixed period of time without risk of a operating cost. For example if the operator is incapable of meeting the payment requirements- the investor can terminate the lease contract and retain the asset back.
On behalf of the operator, running under the concern of a lease rather than a management or contract agreement permits it to have complete control over the day-to-day function of the asset. Conversely it will likewise simulate full risk for any operating losses, while at the same time will endure to be liable for the rent payments throughout the contract term regardless of the accomplishments of the business. With that being said, if the business proves to be positive the operator will preserve the entirety of any surplus.
Who are the operators within the market?
Although the serviced apartments market has been well reputable in countries such as Australia and the United States for a number of years, with well-known branding and established operators, it is still a comparatively new notion within Europe and especially in the UK.
The operators who are dynamic in the market fluctuate from a selection of established major brands. For example Accor/Adagio, IHG/Staybridge Suites, to minor autonomous brands, who often have an prominence on design, who are looking to offer something new to the consumer and differentiate from other competitors within the market.
At the same time as it would appear that the major brands prefer to remain asset light, preferring to adopt the management or franchise agreement operating model, minor independent brands without the equivalent level of financial backing and distinguishable agreement potency might have to contemplate alternative routes depending on the investor necessities.
Concluding
Although serviced apartments continue to be a emerging sector of the market, with a absence of local equivalents for benchmarking and untried brands, it appears probable that the establishments will endure to stay involved but vigilantly, organising their investments appropriately. Conversely as a additional product is conveyed to market- for example the owner/operated brands which have been financed by private equity investment and the success philosophies of the market’s backers are tested. There may be an effort to move away from sale and leaseback configuring concerning towards management and franchising arrangements, as this has been the case in previous years for more conventional hotel functioning models.
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