Serviced apartments: the major player on the hospitality stage

This May Day Bank Holiday, PIT is running a staycation special series on a range of topics associated with a market that is expected to boom again this summer as foreign travel remains off the menu for most. 

What do people look for in a serviced accommodation and why do people choose serviced accommodation over hotels? In this guest piece, the team at One Touch Property Investment take a closer look.

Accommodation can make or break a business trip or family holiday and, with the face of travel having changed so rapidly over the last year, it’s never been more crucial for lodgings to work on every level.

Enter the serviced apartment, which is quickly becoming hospitality’s force to be reckoned with thanks to its sense of space, flexibility and cost-effectiveness. Combining the amenities of a hotel - room service and luxury furnishings - with the positives of an apartment (privacy, flexibility and space), it is easy to see why serviced apartments have become the top pick for both business and recreational travellers.

The benefits of a serviced apartment versus a hotel

With local tourism and staycations becoming ever more popular, the spotlight is on this sector and its top-class gyms, concierge services and fully equipped kitchens, all without the hefty price-tag of a hotel room.

Guests opting for serviced accommodation for their stay do not have to compromise on quality, location or facilities as many are located close to public transport options, business hubs and a host of tourist attractions.  

Explaining why the serviced apartment industry has become the fastest-growing sector within the hospitality industry is simple. While the asset class falls into a similar price bracket to a hotel room, they almost always offer far more space - often up to 30% more – than a hotel offering and with space comes flexibility, meaning that more people can be accommodated.

Families and business travellers alike are drawn by the separation between kitchen, living and bedrooms, ensuring suitable space for children, catering, conference calls and committee meetings. Indeed, so practical is the serviced apartment for the frequent business traveller that many firms have purchased permanent apartments for use by transient staff throughout the year.  

Serviced apartment facilities

Serviced accommodation offers a range of amenities to help keep costs low and contentment high, ranging from designer kitchens to washing machines, dishwashers, and coffee machines, all of which allow for flexibility regarding meals and catering for children or guests, as well as helping to minimise the overall costs involved in a trip.

Many feel this style of accommodation offers a more personal feeling of homeliness than a hotel room, with sofas to relax on while watching TV and the flexibility to put children to bed in a separate room while enjoying the living space without disturbing them – an impossibility with many other forms of accommodation.

When it comes to selecting the ideal serviced apartment, think carefully about what your trip entails on a day-to-day basis. If it is sightseeing and family time, investigate services such as babysitting and housekeeping and ensure parking is easily accessible. Business travellers may wish to ensure there is an ergonomic desk, fast WiFi speeds and room to entertain colleagues.

Are serviced apartments good investments?

Serviced apartment sector growth has already been outpacing that of the more traditional hotel room in recent years and the asset class has really proven itself during the pandemic.

According to the 2020 ‘Spotlight on the European Serviced Apartment Market’ report carried out by Savills Research, while serviced apartments have not been immune to Covid-19 demand shocks, it is an asset class that is better positioned to weather this and any future storms and has been trading above hotels in terms of occupancy levels throughout the period.

Historically, the sector has also performed solidly during low periods of demand, such as the aftermath of the 2007-2009 global financial crisis, which led to skyrocketing operational performance due to the increased focus on corporate cost-cutting measures and a major uptick in the number of contract staff being used.

Serviced accommodation was viewed as a far more cost-effective alternative for travelling contract staff than the traditional hotel room which would have been booked in the past.

The report revealed that the RevPAR (revenue per available room) uplift in the London-based serviced accommodation sector has averaged 5.2% per annum over the last three years, far above the 2% of average annual growth – with a three-year average of 3.3% - noted across the hotel room sector.

Savills suggests that there will be a 41% rise in serviced apartment RevPAR across Europe over the course of this year, with the recovery in this sphere leading the hospitality industry’s overall bounce-back.  Average serviced apartment occupancy levels were also higher in the capital city over the course of the first quarter of last year, at 61.8 per cent compared to the 59.4 per cent reported for hotels.

“Additionally, the typically lower operating costs, coupled with longer average length of stay, continues to support profitability of serviced apartments…compared to full-service hotels,” stated the report.

There is still scope for significant expansion as the sector remains relatively under-represented when compared to other accommodation, representing 9.6% of the average share of hotel stock located across the top ten European hospitality markets, according to Savills.

The resilience and predicted strong recovery for the serviced apartment sector is likely to serve to further highlight its appeal, attracting increasing number of guests and ensuring interest from investors who may be new to this form of accommodation.

Indeed, many of the largest operators look set to more than double their portfolios over the coming years. The Savills report stated: “investor appetite for longer-term development projects points to continued confidence in the longer-term fundamentals of the hospitality sector. In the case of serviced apartments, this longer-term confidence continues to be justified.”

While currently, capital and gateway cities across the UK and Germany account for the majority of upcoming developments, others look set to spring up in secondary and tertiary cities to keep up with demand. In 2019, European serviced apartment investment volumes hit €551 million, far exceeding the five-year average volume by 16.6%, the Savills report went on to say.

One of the major drawcards for investors is the sector’s lean operating structure and the higher-than-average length of stay, ensuring minimal staff are needed to assist with the day-to-day management. These factors contribute to a solid gross operating profit margin - often of around 45-65% – and the confidence that comes with the knowledge that it has always been the leanest operating expense structures that will be best placed to weather demand shocks.

Being able to adapt to the changing needs of travellers, with new additions such as contactless check-in and increased cleaning regimes, has allowed momentum to remain on an upwards trajectory across this relatively young sector.

Serviced apartments are also able to cater to a broad spectrum of society and the ability to remain flexible is one of the key selling points. With the home office being the new must-have, the serviced apartment has even found a new sub-class - the home-away-from-home-office - to cater to.

Many serviced apartment operators have also reported rising demand from firms keen to make use of the apartments as semi-permanent offices.

Serviced accommodation can also offer a more affordable investment than other types of property and comes with a high degree of flexibility for investors as it is available on both a long and short-term lease basis.

That means that the owner can use the apartment to generate rental income and have it operated in a similar vein to a hotel room. That allows the owner to use the property intermittently and rent it out for the rest of the time.

Where to buy a serviced apartment?

The returns that can be achieved by short stay lets can be higher than long-term rentals on the standard tenancy agreement. It does depend on location; coastal towns and popular tourist cities, like York, are ideal for serviced apartment investments.

For example, the recently completed Icona apartments can achieve 7%+ net returns as serviced apartments and 5% when rented on a long-term tenancy, even after accounting for higher management costs (including advertising and cleaning).

In 2018, York received 8.4 million visitors with a hotel occupancy rate of 80%. Clearly people think York is a good place to visit.  Post Covid-19 travel is expected to favour domestic travel and factors like having to obtain a visa for European travel could have a positive impact on weekend breaks.

There are a number of key benefits that go hand-in-hand with investing in a hotel room such as this, including a guaranteed solid rental income as many serviced apartments are leased by the operator on behalf of their owners for a set price and then rented out to travellers.

This means that the owner receives the agreed fixed rate of rental income if the apartment is occupied or not, thereby removing the fear around vacancy periods. Low maintenance and repair concerns are also an attractive proposition for many savvy investors.

The serviced accommodation sector has proven that it is resilient and flexible enough to weather global storms both past and present and it is unsurprising that momentum looks set to continue to build over the coming years, with the asset class even tipped to lead hospitality’s overall recovery.

Today’s travellers expect a lot from their accommodation and this multi-faceted offering suits all styles, from families seeking space, sightseeing and self-catering to corporate clients chasing cost-cutting, concierge and culture.