City serviced-apartments segment sees strong growth trajectory

Europe is expected to see the supply of serviced apartments grow by more than 21% in the next three years, according to a new report on the sector from property adviser Savills. This comes after a year in which transaction volumes in the category fell 43% over the previous year, mainly due to lack of available assets.

The UK remains the strongest market with a share of 47%, followed by Germany (18.4%) and then France (17.3%). However, Munich, Düsseldorf, Frankfurt and Stuttgart are among the Top-10 European cities with most new projects planned. Market leaders Staycity, Edyn and Accor will account for 23% of project volume over the three-year period.

London has the highest number of new serviced apartments planned, with 3,000, followed by Munich. But many smaller regional cities, such as Stuttgart and Manchester, are seeing a growth spurt in the sector. Savills Director of Commercial Research, Marie Hickey, said: "This momentum away from the current largest markets results from the increasing confidence of developers and investors in the serviced apartment sector and its operators, as well as the incentive to enter new, more underserved markets. Investment opportunities are opening up here as well as in emerging sub-markets within established cities such as London and Munich."

The showing of four German cities in the Top-10 ranking is also encouraging, for what used to be very much a niche sector. Karsten Nemecek, head of valuation at Savills in Germany said: "In Germany the sector is slowly emerging from its niche status and is experiencing ever-increasing demand. As a hybrid between hotel and residential and the associated longer length of stay of guests, serviced apartments proved to be more resilient during the pandemic compared to the classic hotel offering. In the future, the market could also benefit from the development towards more flexible working models such as remote working and longer lengths of stay due to the growing environmental awareness of guests."

Richard Dawes, Director EMEA Hotels at Savills, sees many erstwhile hotel investors scrutinising the serviced apartment sector more carefully. "Looking at the fundamentals and their relatively favourable cost structure, serviced apartments will continue to rise in investors' favour over the next few years. Compared to traditional hotels, the sector can score with a less volatile cash flow as well as lower yield fluctuations," he said.

Institutional investors are also increasingly focusing on the segment: Since 2018, around 56% of the total transaction volume of serviced apartments in Europe has been attributable to institutionals. By comparison, their share in the hotel segment was 51% in the same period.

Hannibal DuMont Schütte, the CEO and Co-Founder of Berlin-based serviced apartment provider STAYERY, argues that the growth of the sector in Germany is also a function of changing patterns in the country's housing market, with many of its bigger cities suffering from a chronic housing shortage. The vacancy rate in the cities which are attractive to mobile young employees is below 2%, thus well below the fluctuation reserve of 3%, and actually hindering people moving.

The inflexibility of Germany's housing markets means that young people are increasingly looking at more mobile options beyond the classical rented apartment, or rooms in a shared apartment. Temporary jobs, project and remote work as well as long-distance relationships are common practice, especially among the generation of 18- to 30-year-olds. These people often change their place of work several times a year, and ready-to-use apartments, with a high level of amenities and services and the opportunity to network with other people, serve their needs admirably.

From a development point of view, apartment houses can often be built on brownfield sites or otherwise tricky urban development sites, such as on busy roads at the junction between commercial and residential city areas. Building traditional residential housing might not be an option here, because of the stricter emission limits that apply. Creating serviced apartments can hence be more readily approved and permission granted than with classical residential. The two types of housing are essentially non-competitive, but rather complementary to each other, says DuMont Schütte.

His company is building at four new locations this year - in Frankfurt, Cologne, Wolfsburg and Mönchengladbach - with a total pipeline of 850 apartments. STAYERY already has more than 200 apartments in Berlin and Bielefeld. DuMont Schütte is currently looking for hotels with at least 65 rooms from about 20 sqm each for conversion, or to partner up with developers who were originally planning to build a hotel but could be tempted to switch to a Long-Stay accomodation model.

DuMont Schütte is not alone in thinking that COVID has fundamentally changed the nature of the market, with traditional city hotels facing less business travel, home working, Zoom meetings and the like. Josef Vollmayr, CEO and Co-Founder of Limehome, a serviced apartment provider, does not believe we will see business travel back at 2019 levels any time soon, if ever. "Many larger city-hotel brands will disappear from the market," he believes. Operators are relatively interchangeable and often serve the same, shrinking, target group. "In addition, the pipeline of projects in the development phase at many locations is already very full and long."

The challenges facing many of the traditional inner-city hotels are numerous and complex, and are irreversibly eroding their popularity of the past, with hotel guests now easily able to discover attractive bars, restaurants and nightlife options, along with other additional services outside the hotel. Together with the change in travel behaviour of the smartphone generation who've grown up with AirBnB, Limehome's Vollmayr believes that "all these factors favour much more flexible forms of accommodation such as serviced apartments."

Berlin's Skjerven Group has been conducting extensive research among owner-managed city-hotels. In the company's recent survey of 100 such hotels, two thirds of the participants rated their current economic situation as bad or very bad. Four-star city hotels were particularly gloomy about their prospects. Company boss Einar Skjerven said that with room rates falling at the same time and operations still restricted by hygiene measures, the economic situation of some hotels is becoming increasingly precarious. "In case of further restrictions, about half of the survey participants are considering an exit or a change of their concept. This results in a considerable potential for conversion."