Operators flex serviced apartment models as competition increases

One notable recent transaction is Pandox’s £230 million acquisition of three aparthotels in central London. The freehold properties, operated under Marriott’s Residence Inn brand, are expected to contribute £34 million annually in revenues and £17 million in net operating income, corresponding to a yield of more than 7 per cent. Pandox says over time, there is potential to increase the ADR and yield through targeted investments.

Marc Nelson, executive vice president at JLL, who acted for the sellers Starwood Capital, said: “The brand itself [Residence Inn] delivered phenomenally well. The ADR and RGI penetration rates relative to other hotels were eye-watering.”

There have also been smaller off-market transactions within the NUMA Group/Native Places portfolio, said Nelson, adding that serviced apartments are good models for leasing, making them attractive to institutional investors already investing in student accommodation and build-to-rent.

He noted: “The rent per key that you can generate out of a serviced apartment is always consistently more than a traditional hotel.”

Matt Walton, head of development UK&I, IHG Hotels & Resorts added that he expected investor interest in serviced apartments, along with other serviced living concepts, to “unlock more cash deals.”

Affordable price point

Looking at trading performance, as room rates have compressed over the last 18 months, the competition for the long-stay corporate guest (seven or more consecutive nights) has heated up.

Craig Patterson, chief Development Officer, Cycas Hospitality, said: “This is leading us to think that maybe we need to soften the approach, product wise, and think about more brands like Holiday Express & Suites, which are slightly smaller rooms, maybe less amenities, but at a more affordable price point so we can compete with some of the other players in the market.”

Since its 2006 debut, the IHG brand Staybridge Suites has not expanded as much as hoped in the UK, said Walton, which is one reason why IHG is now introducing the lower-priced Candlewood Suites brand into Europe.

Under IHG’s agreement with German operator Novum Hospitality to convert 119 of its hotels to IHG brands, there will be 11 Candlewood Suites in Europe over the next few years. Walton said he is looking for opportunities to launch the midscale extended stay brand in the UK too.

It can take time for a brand name to become established and recognised by the consumer. Robert Alley, brand development director, BWH Hotels Great Britain, said that although BWH has its own specific extended stay brands, when they opened a 48-key aparthotel in Liverpool they chose to name it: ‘Dockside Aparthotel, BW Signature Collection by Best Western.’ Signature Collection is an upper-midscale brand that is already established in the UK, said Alley.

Rethinking and fine-tuning

Operators are continuously fine-tuning their properties to achieve the best results. Patterson noted that Cycas recently opened the first Holiday Inn Express & Suites in the Netherlands which provides the combination of 93 guest rooms and 16 fully equipped suites for short and longer stays.

However, it has been hard to sell the suites to longer stay workers and people relocating because the kitchens are too small, he said: “We shrank the kitchens too much and it’s been hard to sell them through extended stay agents. So, the next one we’re going to deliver in Switzerland will have more traditional full kitchenettes.”

Lyslee Li, senior associate at Klarent Hospitality, noted the emergence of businesses that emphasise co-living elements, such as The Other House in South Kensington, London. F&B services can dilute the superior profit margins of a traditional serviced apartment approach, she added.
on agrees that the market is very fragmented across co-living, aparthotels, serviced apartments, with blurred or loose definitions, but this fragmentation is creating opportunities.

For Patterson at Cycas, an extended stay property with fewer than 65 keys is not viable, but should not be too big either; between 75 and 115 keys is best, he said.

For larger properties, say a 200-key hotel, there is the potential to flex the offering for different target audiences and have 130 traditional hotels rooms, 50 extended stay suites, and 20 tiny ‘urban’ rooms. Nelson said: “As an asset owner, that's what you want, because you want to be able to take market share from all the demand drivers.”

All quotes taken from the panel ‘The Evolution of the Serviced Apartment Segment From Niche to Core’ at the Annual Hospitality Conference 2024 in Manchester.

By Ben Walker