Serviced apartments offer a “safe bet” for investors

As economic headwinds increase, prospective investors are becoming more cautious

In July of this year, Capital Land, the owner of Singaporean accommodation group, The Ascott Ltd, announced the acquisition of serviced apartment company Oakwood, adding 81 properties to its global portfolio, bringing the total to circa 900 assets worldwide and reinforcing interest from investors in the serviced apartment sector. What does this global transaction tell us about the serviced apartment sector more generally, and how will this be reflected across EMEA?

In 2020, London’s hotel market experienced RevPAR declines at a much sharper rate compared to serviced apartments. According to data from STR, hotels were impacted by a 78% decline compared to a 57% decline across the serviced apartment sector. While it remains difficult for serviced apartment performance to be compared to hotels due to the lower coverage in non-core locations and less product available in the economy segment, the performance experienced during the pandemic is telling.

Often perceived as a “safer haven” than traditional hotel assets, serviced apartments offer home-from-home facilities, which allowed for an easy adaptation of COVID protocols, particularly in terms of personal space. Serviced apartments also operate a more cost-efficient business model, commanding higher RevPAR and more stable revenue, due, in part, to the greater reliance of bedroom revenue relative to traditional hotel operating models. At the same time, leaner cost structures provide for more efficient profit margins, providing more dependent and less volatile returns for investors.

Now that COVID restrictions have subsided, can serviced apartments continue to differentiate themselves from hotels and strengthen their position? Both sectors have experienced an uplift in demand during 2022 with what is often referred to as “revenge spending” benefiting from increased leisure demand. Year-to-August 2022, RevPAR in London-serviced apartments have surpassed pre-pandemic levels over the same period in 2019, compared to hotels, which are still 7% below pre-pandemic RevPAR, seemingly indicating that the serviced apartment sector continues to move from strength to strength and building on the momentum created over recent years.

Through a heightened interest of serviced apartments during the pandemic, we expect to see a long-term positive impact for the product across Europe, from both consumers and investors alike. In addition, there have been initial signs appearing that corporate travel will no longer consist of many short trips, rather will be replaced with fewer extended trips, further boosting demand for serviced apartments.

In terms of transactions, investors have gained renewed interest in serviced apartments, following their ability to consistently perform during the pandemic. In terms of yields, serviced apartments have historically traded at a higher yield than the private rental sector and build-to-rent sector, more aligned with hospitality assets, although the lack of available and transparent data often resulted in a higher risk associated with these assets.

Serviced apartment operators such as Edyn, StayCity, Rooms2 and City ID continue to expand throughout the region. While these new additions may not increase serviced apartments as an overall proportion of total accommodation supply, we are however likely to see an increase in purpose-built properties, creating a move towards a more consistent product offering.

Institutional investors continue to support existing operators, with APG acquiring a stake in City ID in 2019 to expand the aparthotel offering to European capital cities. The fragmented nature of the sector provides opportunities for consolidation, which we witnessed at the tail end of 2021 when Fortress Investment Group acquired a majority stake in PREM Group, enabling the expansion of Premier Suites.

However, while demand for serviced apartments remains, with rising interest rates and energy prices together with macro-economic head winds, will serviced apartments continue be to a “safer bet” than traditional operating models?

As economic headwinds increase and create more uncertainty, prospective investors are becoming more cautious, with a polarisation of sentiment towards the sector more generally. Given the current environment, less volatile cash flows and labour cost are likely to stimulate strong further interest in the serviced apartment sector.

With an increasing number of investors seeking exposure to operational real estate, we expect the appetite for an asset class that can provide a hedge against inflation; offer investors an underlying asset in a core or often prime location, with an efficient operating model in a period of labour and utility market uncertainty, will continue to receive increasing amount of attention. We also expect as additional institutional capital seek opportunities in the operational real estate, they will be more likely to deploy capital into the most stable segment of the market.

Investment decisions are increasingly reliant on environmental, social, and governance (ESG) principles, with investors taking note since the pandemic. In considering this aspect, serviced apartments could prove an advantageous asset class, which can fit well with investment strategies, ESG ambitions and target returns. Serviced apartment operators Rooms2 – the world’s first fully net zero hotel – and Beyond Apartments are fully focused on their ESG credentials, a key differentiator for targeting both investors and consumers alike. The sector encourages longer guests stays, reducing the frequency of travel and associated use of transport, while offering servicing often on a weekly schedule, in turn lowering overall energy costs.

As we navigate this period of economic uncertainty, we are already witnessing a polarisation of the investment market as many investors seek safe havens for their investments. With most serviced apartments benefiting from core urban locations, we anticipate that they could become an increasingly sought-after assets class. At the same time, in a period when energy security is top of the agenda investors will be attracted to the less energy intensive business model offered by this sub-sector. This dovetails nicely with the ever-increasing importance placed upon ESG credentials.