The serviced apartment market in the UK is performing well and has the potential for future growth, making it an attractive property investment opportunity. A new report by Savills into the state of the sector highlighted the high occupancy rates of this sort of accommodation, in addition to strong yields that are more favourable than comparative asset classes, like residential real estate in the private rental sector (PRS). According to the firm, investors can expect yields of 6.25 per cent on serviced apartments in central London, compared to the 3.8 per cent return currently generated on prime residential properties. Meanwhile, vacancy rates for serviced apartments are considerably lower than those recorded in the hotels sector, which means they may appeal to investors who typically target assets in the hospitality industry, too.
Adrian Archer, of Savills Hotels & Healthcare, commented: "With long-run occupancy 5.8 percentage points higher than hotels, but with almost double the operating profit margin, serviced apartments clearly offer an attractive alternative to hotels." The organisation noted the "quasi-residential nature" of this type of property is also likely to attract investors who usually focus on the UK's housing market, but who are seeking a "greater yield play". In its study of the market, the real estate company highlighted the potential for expansion within this sector, particularly in London where the supply of serviced apartments is considerably lower than in other global cities like New York and Hong Kong.
Savills believes a further 16,300 units could be added to the UK capital's market, which would put it on a par with similar large metropolises elsewhere in the world. However, the firm acknowledged a significant amount of marketing will need to be carried out in order to convert the latent demand, particularly from businesses, into actual clients. Focusing on the cost-effective nature of serviced apartments compared to long-term hotel stays could be one way of attracting new customers, the organisation added.
It isn't only Savills that is confident there is room for growth within this market - the Association of Serviced Apartment Providers (ASAP) recently asserted that the sector in the UK is expected to perform well over the course of 2012. In its report looking back at 2011, the organisation revealed the average weekly rent for this type of property in London increased by four percentage points, compared to 2010, to stand at GBP 945. Meanwhile, data for the rest of the UK showed a three percentage point rise in weekly rents, which now stand at a median GBP 611. The British serviced apartment market is also outperforming other European Union nations, with the UK accounting for 11.3 per cent of all the revenue generated by this sector across the 27 member states.
Chairman of the ASAP and director of City Apartments David Smith asserted: "Last year was one of the most exciting years for our sector in terms of growth, stock and quality. 2012 will be a challenging year as a result of the prevailing economic climate, but the serviced apartment industry is in a good position to ride it well by continuing to deliver the best-value products in terms of overall cost per stay." Savills predicted occupancy levels will remain stable this year, due largely to the restricted supply of this kind of property. In terms of real estate investment prospects, the firm anticipates private equity investors will be the "driving force" behind the sector, commenting interest from institutional funding sources will develop in much the same way as it did in the hotel market, with institutional investors expected to make their first steps into the industry in two or three years' time.
The Savills UK Serviced Apartment report is available for download in full here (exclusively for IPIN members)
- Friday 16 March 2012