a new hospitality opportunity - native · 2 a new hospitality opportunity serviced apartments have...

A new hospitality opportunity An update on the UK serviced apartments market

2 A new hospitality opportunity

Serviced apartments have been gaining popularity among travellers as an alternative accommodation option. However, it appears that the sector is much stronger in the Asian and U.S. markets. One of the major reasons is the lack of a common understanding about what exactly a serviced apartment is in the hospitality market. The absence of a well-established brand has also led to the impression that serviced apartments are not a mainstream product.

Serviced apartments represent a broad range of short-term accommodation available to travellers, bridging the gap between a traditional hotel and residential housing by offering furnished rooms at a convenient location. They are generally bigger in room size but within a similar price range of a hotel room. The UK serviced apartment market is very fragmented with products such as corporate housing, extended stay, short stay, residences

Serviced Apartments & Aparthotels – bridging the gap between hotels and private rentals

and aparthotels all operating under the term serviced apartment. The variations are largely based on service offerings such as minimum stay requirements, location, room size and ancillary services. The key differentiation lies in the length of stay – i.e. Fraser residences have minimum stay requirements; their main target market is business guests on short term assignments where location is their primary concern. On the other hand, Citadines, Adagio and Staybridge suites are all available for one night stay. Their business model is more in line with an aparthotel, providing business to consumer (B2C) services and has a similar client base as a hotel. Operators such as BridgeStreet and SACO both offer short and medium term stays depending on location and ancillary services such as weekly house-keeping. Their businesses are more business to business (B2B) focused.

Private Rented (PRS)

Shar

ed A

ccom

odat

ion

(i.e.

Airb

nb)

Serviced Apartments & Aparthotels Traditional Accommodation

Cat

egor

y

Buy to let Private rented communities (Build to rent)

Extended Stay Serviced Apartments Aparthotels Hotel

Facil

ities

Private property Part of a residential unit

Part of a residential unit, with a small kitchenette or full

kitchen

Similar to aparthotels, studio or multiple-

bedroom apartments

Studio or 1 bedroom apartments with a

small kitchenette, part of purpose built blocks

Room only

Serv

ices All tenants

responsibility including utility bills

Potential concierge, communal areas

Potential concierge, weekly cleaning

services

Concierge, 24h or part-time reception, cleaning services (weekly or daily)

24 hour reception, limited food offering, cleaning services, small kitchenette

Full-service, food offering, 24 hour reception, daily

cleaning services

Leng

th o

f Sta

y

Deposit required, minimum contract

of 6 months

Minimum contract of

3 or 6 months

Minimum stay required depending

on brand

No minimum stay restrictions

No minimum stay restrictions, mix of short stays (3-7 nights)

Short stay

Sam

ple B

rand

s

Buy to let landlords

Essential Living, Fizzy Living,

Vita Student, HI Common, Be:here, We live, Gridzen

Bridgestreet, Fountain Court, House of

Fisher, Oakwood, City Apartments,

Supercity

SACO, Ascott, Marlin, Cheval Residences,

Go Native, Portland Brown

Adina, Staycity,Adagio, Frasers,

Marriott Executive Apartments

Hilton, Marriott, Holiday Inn,

Novotel

The general understanding of Serviced Apartments and Aparthotels is still not very clear to travellers. The above table attempts to illustrate the characteristics for each of them.

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The U.S. market

According to the Association of Serviced Apartment Providers, globally there are around 775,000 serviced apartments, with the U.S. accounting for over half of the inventory. Serviced apartment, also widely known as “Extended Stay” in the U.S. has long been a popular option among business travellers. It appeals to the market by providing a flexible “home-style” accommodation with modern facilities in strategic locations.

Europe is a less mature market compared to the U.S. mainly due to a different demand profile. Business travellers tend to have shorter business trips because they can travel easily by train or budget airlines. During the recession, many companies had to reduce their travel budget by cutting back on business trips. In addition, the sector is dominated by independent owner operators without a recognised brand when compared to the U.S. and Asia Pacific. Guests are also less receptive because of uncertainty in product quality.

c. 400,000 serviced

apartments in the U.S.


The UK, France and Germany are mature markets within Europe, with demand primarily corporate driven in key cities such as London, Paris and Berlin.

French hospitality company AccorHotels launched its Adagio Aparthotels brand in a joint-venture with Pierre & Vacances back in 2007. It has been a key player in the sector and now has over 100 properties across Europe, the UAE and Brazil. Other operators include Apart'City, Residhome and Citadines. Over the past few years, a couple of serviced apartment buildings were converted to residental apartments, student accomodation and hotels, this has an important impact on the quality of the exisiting supply as 40% of them are less than five years old.

In Germany, serviced apartments are the second most invested sector in the hospitality industry. Major business hubs such as Berlin, Munich and Frankfurt have the largest share of serviced apartments, with over 75% run by private operators. Adina Apartment Hotels and the Germany’s Derag Livinghotels are the two big names in the sector. Other brands such as Adagio Aparthotel, Citadines, Frasers and Staycity also have presence in key locations.

The industry has developed a certification system “Verband Destsches Reisemanagement e.v (VDR) which has helped raised and maintained service quality. Most of the existing supply offers a studio, with the size similar to a hotel room. There is a growing need for larger apartments, which is rarely available in the market.

Within the UK, London is the most mature market due to its position as Europe’s key financial centre. There is a strong demand for serviced apartments and occupancy tends to be above 75%. However, according to AM:PM, the city is hugely under supplied with serviced apartments taking up only 7.5% of total room inventory – a lot lower than other parts of the world.

The changing business landscape in London has contributed to the growing demand in serviced apartments. London is fast

The European market

becoming the city of choice for tech companies with Google, Facebook and Amazon setting up offices in the capital. This new workforce has an impact on the hospitality industry as they represent the new wave of millennial travellers who want to experience cities like a local. Serviced apartments best suit their need for a “home away from home” accommodation.

The latest benchmarking data from STR supports this trend. In 2015, RevPAR across the UK rose 4.7%, backed by increases in both average rate and occupancy. London reported an uplift in average rate leading to a 3.1% growth in RevPAR. The rest of the UK also reported positive results, with occupancy and average rate up 1.5% and 2%, respectively.

This news came at a perfect time when operators started announcing aggressive expansion plans. Growth isn’t limited to London but to other major cities with a strong mix of business and leisure travellers. Marlin Apartments announced plans to double the number of units by 2020. They are also expanding outside London to capture the leisure market which was not their target market before. Staycity is opening new properties in Manchester, Heathrow and Birmingham. Go Native is also investing in areas such as Manchester, Bristol, Newcastle and Reading. SACO, who was acquired by Oaktree Capital Management in 2015 has rooms in the pipeline in Aberdeen, Edinburgh and London. Smaller operators such as Lamington and Prem Group also have new developments in the pipeline.

There is a strong demand for serviced apartments in London, occupancy tends to be above 75%.

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UK Serviced Apartments and Aparthotels landscape

Serviced apartments in London secure less than 10% of total room inventory. The figure is even lower in the regions, at 3.9%. There are huge opportunities in this sector as average rates for serviced apartments are normally lower than hotels, thus representing huge savings for corporate travel. From an investment perspective, owners benefit from higher occupancy and lower operating cost than hotels.

UK Serviced Apartments vs Hotel Room Supply 2016

UK Cities

Source: AM:PM

London Regional UK

100%

98%

96%

94%

92%

90%

88%

Hotel Rooms Serviced Apartments

7.5%92.5%

1.8%98.2%

Source: AM:PM

100%99%97%95%93%91%89%87%85%

Liverpool Aberdeen Edinburgh London Birmingham Leeds Bristol Manchester Glasgow


11.8%88.2%

8.4%91.6%

7.6%92.4%

7.5%92.5%

6.5%93.5%

6.3%93.7%

5.5%94.5%

5.2%94.8%

3.9%96.1%

London

100%

98%

96%

94%

92%

90%

88%


7.5%92.5%

Source: AM:PM, STR

Singapore

10.0%90.0%

London vs Regional UK London vs Singapore


The UK serviced apartment sector is set to grow in the next few years, led by London with over 1,500 rooms due to open between now and 2019. Other cities such as Edinburgh and Manchester are also seeing new developments. Unlike London, serviced apartments in regional cities are mainly developed by branded operators, targeting both leisure and business travellers. Examples include SACO in Bristol, and Adagio in Edinburgh. Roomzzz is also expected to increase their inventory across four regional cities. It is estimated that Manchester has 2.2 serviced apartments per 1,000 overnight international business travellers, compared to 2.9 in London. The figure is even lower in Birmingham, at 1.4. With changing consumer preference and growing corporate demand, there is potentially room for expansion.

A booming UK pipeline

Pipeline by UK CityNu

mber

of R

ooms

Due 2016 Due 2017 Due 2018 Due 2019

Pipeline by Brand

Source: AM:PM

1000

800

600

400

200

0

Numb

er of

Roo

ms

Staycity SACO MarlinApartments

RoomZZZ Go Native AccorHotels Marriott Cycas Hospitality

Ascott Group Prospere Hotels

Starwood Hotels & Resorts

Source: AM:PM

2000

1500

1000

500

0London Edinburgh Manchester Liverpool Aberdeen Birmingham

Grange Hotels

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Key players across Europe

A selection of major serviced apartment operators across Europe

Operator Brand

AccorHotelsAdagioAdagio AccessNovotel Suites

The Ascott LimitedCitadines Apart’hotelsAscott The ResidenceSomerset Serviced Residence

BridgeStreet Global Hospitality Residence by BridgeStreetLiving by BridgeStreetMode by BridgeStreet

Frasers Hospitality

Fraser SuitesFraser PlaceFraser Residence Modena by FraserCapri by Fraser

Go Native Go Native

InterContinental Hotels Group Staybridge SuitesCandlewood Suites

Marlin Apartments Marlin Apartments

Marriott InternationalMarriott ResidenceMarriott Executive ApartmentGrand Residence

Oakwood Oakwood

Roomzzz Aparthotel Roomzzz Aparthotel

SACO Apartments SACO, Locke

Starwood Hotels & Resorts Element

Staycity Staycity Aparthotels

Toga Group Adina, Medina

Zoku Zoku

Source: AM:PM

The European serviced apartment sector is served by many independent operators and brands such as SACO, Adina, Go Native, Staycity and BridgeStreet. International hotel brands have recently joined the party and developed their own serviced apartment brands. AccorHotels established the Adagio brand in 2007. Starwood Hotels & Resorts is about to launch its first serviced apartment brand – Element in London Tobacco Dock in 2017.


The below table attempts to list the average room size of serviced apartments offered by various brands. A studio is normally around 28-30 sqm while a one bedroom apartment ranges from 30-46 sqm depending on the brand.

Brand No. of Rooms Average Room SizeAdagio Studio / 1BR 25 sqm / 35 sqmApartHotels by Bridgestreet Studio / 1BR 28-30 sqm / 40-45 sqmAscott The Residence / Citadines Apart’hotels Studio / 1BR 28 sqm / 38 sqmCarpri by Fraser Studio / 1BR 25-30 sqm / 30-45 sqmElement Not Specified 51 sqmFraser Suites Studio / 1BR / 2BR 35 - 45 sqm / 45-55 sqm / 55-80 sqmResidence Inn by Marriott Studio 30 sqm / 50 sqmSACO Apartments 1BR 38 sqmStaycity Aparthotels Studio - 4BR 28 sqm Zoku Studio / Loft / 1BR 16-46 sqm

Source: JLL Research

Typical size of a serviced apartment

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Up and coming operators

One of the recent major highlights in the serviced apartment sector is the acquisition of SACO by Oaktree Capital Management in 2015, with a portfolio of 1,645 serviced apartments, including 945 new apartments across ten properties in London, Amsterdam, Edinburgh, Glasgow, Aberdeen and Dublin. A new brand Locke, which is designed specifically for millennial travellers has just been launched. According to AM:PM, the brand will add around 580 rooms to the market in 2016 and 2017.

Zoku is the latest live/work serviced apartment concept created by CitizenM co-founder Hans Meyer. The brand aims at a network of global business travellers, known as global nomads. The first Zoku opened in Amsterdam, with other European gateway cities such as London, Paris and Berlin also on the radar.

Go Native is also expanding their market share in London. A total of 258 rooms are expected to open between now and 2018. Staycity is another one to look out for and currently has over 1,200 apartments in Dublin, London, Paris, Amsterdam, Edinburgh, Manchester, Birmingham and Liverpool. The company plans to grow its portfolio to 4,000 rooms across Europe in the next few years.

Starwood Capital has been active in 2015 with the acquisition of a portfolio of four extended-stay hotels located in Tower Bridge/Bermondsey and Earls Court/Kensington. One of the company’s goals is to invest in markets with low supply.

Over 1,500 serviced

apartments are expected to open between now and 2019 in London


Transaction volumes in the UK have seen steady growth over the last couple of years with total serviced apartment deals reaching £325m in 2015, a 114% uplift compared to the prior year. Key transactions included the sale of the Think Serviced Apartments Portfolio to Starwood Capital Group and the Roland House Apartments in London sold to Muirgold Ltd for £59m. During the first quarter of 2016, two deals took place in London, including the 77-room SACO The Cannon and 268-room Staycity Serviced Apartments & Aparthotels London Heathrow, sold for £32m and £35m respectively. Investment funds and private equity firms are the most active buyers in the market, while developers / property companies are catching up. JLL also have a significant number of transactions within the pipeline which are likely to close later this year. The serviced apartment sector has been on the radar of investors due to improved product awareness and changing travellers’ behaviour.

The UK Serviced Apartment transaction market

How investors value serviced apartments?

£350

£250

£150

£50

0

UK Serviced Apartments Transactions

2011 2012 2013 2014 2015 Q1 2016 Q12015

Millio

ns

201020092008

Source: JLL

Transaction volumes in the UK has seen a 114% uplift compared to the prior year, with total serviced apartment deals reaching £325m in 2015.

Real Estate Value – investors will sense check the value of the property compared to a residential building, in case they need to convert the building in the future.

Revenue from day-to-day operations – the increase in both tourist arrivals and corporate travel has caught the eye of potential investors.

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It is definitely an exciting time for the serviced apartment industry. The industry is evolving with new products coming to the market to meet changing customers’ needs. Travellers demand for a "home away from home" accommodation is not limited to business travel but for leisure as well. Technology plays a key role in both product design and booking platforms. New lifestyle brands such as Zoku, SACO and Element emphasise on providing a flexible home/office short-stay accommodation, mixed-used social spaces with services of a hotel.

At the same time, the industry is very fragmented without a known brand. Brand consolidation is expected as the sector grows stronger. This will improve product clarify which will help increase customer awareness of this sector. The acquisition of SACO by Oaktree sets to lead the wave.

Outlook

Operating Structure

Similar to hotels, serviced apartments and aparthotels normally operate under a lease, management agreement, franchise or private ownership. Private companies such as The Ascott Limited and Frasers Hospitality normally own their properties, while institutional investors tend to look for a lease agreement for a secured return. LaSalle Investment Management has recently funded the development of Staycity in Deptford for £9.6m

Operating Model

Business models are also changing and operators have been innovative in forming strategic alliances to expand their businesses. Go Native and SACO have both partnered with PwC to provide cost-effective business solutions. Go Native handles PwC’s travel programme, providing on-site support for apartment bookings and reporting. SACO manages accommodation for project work which last for one year or longer. Bridgestreet has recently teamed up with Airbnb for business and their properties are available to book on the Airbnb website. The Ascott Limited has also formed a joint venture with Tuija.com, China's largest online apartment sharing platform. Both operators are tapping into the online platform to widen their distribution network.

From an investment perspective, private equity and institutional investors have been eyeing this sector as they gain more understanding of the product with the availability of benchmarking data. Property investors are also starting to take an interest because of the attractive yields compared to a 3-star/budget hotel due to the relatively low operational costs.

Serviced apartments are starting to be seen as a good investment opportunity because of its high profit margin, stable cash flow, high space efficiency, conversion flexibility and lower development cost. It can also be a solution to the oversupply of residential properties.

We expect to see more transaction activities in the coming months.

COPYRIGHT © JLL IP, INC. 2016. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.

July 2016

Will DuffeyExecutive Vice [email protected]+44 (0) 20 7087 5587

Graham CraggsManaging [email protected]+44 (0) 20 7399 5969

Kathleen Van den BrandeVice [email protected]+44 (0) 20 7399 5941

Eva ChanResearch [email protected]+44 (0) 20 7087 5125

Max ThorneManaging [email protected]+44 (0) 7885 820 842

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