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Serviced apartments:  the hospitality sector’s latest success story

Serviced apartments investments
Jan 29, 2018

You may not actually have heard the term ‘serviced apartment’ before; up until now, it’s been more of a phrase used within the travel and hospitality industries.

But you may well have stayed in one – like a hotel room only bigger, with a kitchen and one or more separate bedrooms, at least one bathroom, a living area and up to date in-room technology.

They originally started out as alternatives to city centre hotel accommodation for business travellers or staff who were relocating, but they’re really catching on now as an economical leisure option, especially for groups and families.

In this article we’ll see why they’re so popular with guests and how they represent such a good investment opportunity.

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Make yourself at home for less

One of the first things that strikes you about a serviced apartment before you even get there is the room rate at the time of booking. One of the reasons they have been so successful is because the operators eliminate non-essential overheads and low-margin spaces, such as in-house catering and large public lobby areas.

Sector specialists JLL reckon that about 60% of a hotel’s total revenue goes on operating costs, with one member of staff on average for each room. The ratio for serviced apartments is 40% on operating costs, with one member of staff for every 5 rooms. These savings translate into a much more affordable type of accommodation.

Something else you notice immediately is that everybody has room to spread out, yet have their own space when they need it. This is particularly important for families and groups who are on holiday; it’s expensive to upgrade to a family room or suite at a resort hotel, whereas a typical serviced apartment can sleep 4-8.

There’s room for all the kids’ paraphernalia without it cluttering up the living areas, and the well-equipped kitchen means you can have breakfast when it suits you if you fancy a lie-in; no need to rush because the hotel kitchen shuts at 9.30 a.m. and no knock on the door from the chambermaid to disturb you. Room cleaning is available, of course – but when it suits you, not the other way round.

Self-catering isn’t just more flexible, it saves you money too.

You don’t need to go to expensive restaurants – everything you need to cook and eat will be to hand, from a range of matching plates, glasses and cutlery to kitchen knives that actually cut stuff and all the labour-saving devices and utensils you’d have at home. There’ll be a food store onsite or nearby, or you can just order up a takeaway and watch a movie on your high-end TV – which saves money on entertainment too. You’ll have a washing machine and dryer along with a dishwasher so the chores are minimal.

The Airbnb effect

The rise and rise of Airbnb isn’t restricted to millennials and tech-savvy oldsters; more and more travellers across the generations are discovering the appeal of the whole ‘live like a local’ experience. The emergence of the ‘bleisure’ sector, which combines business with pleasure, means that serviced apartments are no longer the preserve of corporate travellers.

However, while it’s great to take over someone’s apartment for a break, there are issues with the Airbnb offering, including inconsistencies in levels of security, insurance, health and safety, fire precautions and service in general.

This is where serviced apartments stand out, by taking the best bits of Airbnb and marrying them with the best bits of staying in a hotel, all to an assured standard.

Future developments are likely to include the provision of more open lobby or communal spaces, according to HVS Hospitality Intelligence, which can be themed as appropriate to local events, customs and culture to enhance guests’ stays. Sightseeing isn’t enough these days; immersion experiences and a sense of destination are important.

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The investment appeal

While it’s true that the big hotel chains are behind most of the sector’s expansion, there are more and more opportunities for private investors in serviced apartments both overseas and here in the UK.

UK yields currently range from 6.5% – 9.5% – higher than hotels (JLL).

The low operating and fixed costs we mentioned earlier, along with the wider range of business and leisure guests, mean occupancy levels of 81% in the UK serviced apartment sector and 76% in the USA (The Highland Group).

The steady income generated by these occupancy levels makes investment in a serviced apartment very attractive indeed. High margins, consistent cash flow, space efficiency, ease of conversion and lower development costs can result in NET annual yields of 8-12%, either as a contracted fixed income in the UK or as a majority rental revenue share agreement in the US.

Of course, as a highly specialised sector of the hospitality industry, a serviced apartment needs to be run professionally onsite 24/7 for everyday operations, with a back room global marketing and booking resource to attract as many guests as possible from all around the world. Not only does this maximise occupancy and rental revenue, it also means investors can sit back and let someone else do all the work – at no extra cost.

Next steps

Serviced apartments are still quite a new sector, so it’s more than likely you’ll have a few questions. Feel free to have an informal, no-strings chat with one of our friendly consultants; they all know the market backwards and will be glad to share their experience with you.

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