Is Geography to Blame for Slow Apart-Hotel Growth in UK?

The UK apart-hotel sector has traditionally lagged behind Asia and the US, with a recent report from Savills revealing that there are just 1.2 units for every 1,000 business visitors in London, while New York boasts 5.2 units.

The UK apart-hotel sector has traditionally lagged behind Asia and the US, with a recent report from Savills revealing that there are just 1.2 units for every 1,000 business visitors in London, while New York boasts 5.2 units. With London experiencing almost 50 per cent more travellers than parts of Asia, including Singapore and Hong Kong, the capital's lack of business prowess cannot be blamed for this shortfall.

According to Marie Hickey, associate director of Commercial Research at Savills, it is in fact simple geography that has caused the British apart-hotel market to lag behind its contemporaries. "One of the reasons the serviced apartment market is more established in Asia Pac and the US is probably originally down to the travel distances involved," she said.

"Corporate/business travellers in these markets tend to travel much further distances therefore making it impractical to travel home at weekends, as a result staying in a serviced apartment for long periods of time is far more attractive than staying in a hotel.  In the case of the Asia Pac market, serviced apartments are increasingly appealing to those who may have otherwise gone into the rented sector as SA [serviced apartments] offer greater flexibility in terms of length of stay (i.e. typical lease period for HK [Hong Kong] resi flat is two years), as well as having the added services," Ms Hickey continued.

In Asian markets specifically, the hotel real estate market is geared towards buyers, making the country a lucrative property investment prospect. Apartments can be sold as strata title investments for private individuals, which encourages expansion as pre-selling apartments assist in the quest for funding. "Funding to private individuals for such investment has not been made readily available for such a structure to take off," Ms Hickey justified. "Guestinvest were a bad example and only Park Plaza and Galliard have had some success in London."

However, the situation is beginning to change, albeit slowly, with the Global Serviced Apartments Industry Report 2011-12 highlighting that the UK apart-hotel market is still the largest in Europe, accounting for 11.3 per cent of total revenue generated by the industry on the continent in 2009. Yields are also performing well, with prime assets in Central London commanding in the region of 6.25 per cent. This is higher than the 5.75 per cent expected for top hotels in the city and is in line with current student housing yields, which stand at 6.25 per cent.

Such a positive performance indicates the presence of significant investment opportunities for those considering entering the apart-hotel industry. Savills have noted specifically a rise in the number of individuals carrying out their own development projects, with the availability of existing stock possessing appropriate planning use designation/license currently being restricted. Nevertheless, in the UK investors are still facing problems getting development funding, with a scarcity becoming prevalent across the wider market. "As a result operators are largely looking to private equity partners and joint ventures with developers in order to achieve this expansion," Ms Hickey said.

What's more, Savills expects that the industry to increase its profile over the coming years, much in the same way as student accommodation did previously. Currently, the concept has received little attention from the wider UK population, with many unsure what they entail. Therefore, a rebranding could help to publicise the opportunities available in the market and help companies to develop their own definitive character. With apart-hotels already enjoying high occupancy - 87 per cent over the last three years, compared to 81 per cent from hotels - and low operation costs, there is no reason why the sector won't attract considerable property investment interest going forward.

- Thursday 22 November 2012

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