Investors taking note of strength in serviced apartments sector

Within the embattled hospitality sector, one asset category that has been flying high in Germany is serviced apartments, which appear to have bounced back strongly enough to meet owners's expectations for the year, with rates holding up more firmly than expected.

The consulting group Apartmentservice, in its latest annual market report, reports that 75% of the operators surveyed viewed the development of their properties this year as either "good" or "very good", with eight out of ten expecting to reach their turnover target for 2022. The serviced apartment sector counts more than 43,000 units across Germany, with business travellers remaining the core clientele. With new projects in the pipeline, the number is expected to exceed 50,000 by end-2024.

Increased occupancy figures, especially since April, seem to be the main driver of this optimism. While only about 50% of the available units were ocupied at the beginning of the year, the figure had stabilised at about 80% over the summer month, raising the average occupancy rate to 73% for the first eight months (up from 61% through 2021).

Anett Gregorius, founder of Apartmentservice, said the increase in occupancy had not come on the back of lower rates. Over the first six months, the average daily rate increased by a third, in both the long-stay and the short-stay sectors, which primarily benefits from holidaymakers.

Hotel consultancy group MRP believes that the category of serviced apartments will have fully recovered its pre-pandemic position by 2023. Lots of new money is flowing into the category, particularly from original hotel projects that are now destined for conversion into long-stay units. This has not always been smooth sailing, with local authorities frequently raising objections to attempts to alter building purposes and tying hopeful developers up in red tape.

"The apartment concept is now firmly established and remains highly dynamic", said Apartmentservice's Gregorius in a recent posting. "Temporary housing concepts have become more relevant than ever for the cities of tomorrow and hold great opportunities in view of the living and working needs of tomorrow. For this, however, we as stakeholders must enter into an exchange with municipalities with even greater transparency and jointly establish terminology, fixed definitions and framework conditions - ideally by anchoring the term "serviced apartments" in building planning law.

"Serviced apartments are commercial offers as part of the accommodation segment with a length of stay of up to six months and at the same time must meet modern 'limited stay' requirements. This needs a clear classification under building law. Only in this way can we distance ourselves even more clearly from rent-seeking and housing displacement issues.

The demand for travel, including business travel, has clearly risen again following the pandemic. But it's obvious that many hotels are overstretched, and can't attract enough staff to provide an adequate service, a situation which is likely to pertain for some time. Attracting good staff now costs more money, which eats into margins. Hence the growing interest in accomodation concepts that are less staff-intensive than a classical hotel with its restaurants and bars, along with reception and room staff.

Business trips, when undertaken, are now lasting longer. For example, AirBnB's fastest-growing segment in the second quarter of this year was for guests staying 28 days or longer, a growth of 25% compared to the same period last year.

Investors are taking notice. The Munich-headquartered Limehome has just raised a further €45m for its expansion, which currently consists of more than 3,000 apartments at nearly 100 locations across seven European countries.

Because of the surge in building costs over the past two years, Limehome is now focusing more on strategic partnerships with existing property owners, in which it takes over the assets to manage as a tenant. An example is Joyn, a Düsseldorf asset that fell victim to previous owner Corestate's near-insolvency, before hiving off some of its better properties. Limehome partner IMAXXAM bought the asset (for Union Investment's AIF real estate special fund 'GENO Rheinland Real Estate'), which Limehome will now manage as a 70-unit serviced apartment complex over five floors.

Guests can book the apartments for either short or long-term stays. Apartment sizes range from 20 to 40 sqm, and are mostly equipped with a kitchen. The property The location also has a spacious community area, a terrace, an underground car park, an inner courtyard with seating and a fitness studio (all of which can be used free of charge by Limehome guests).

Another group expanding rapidly is NUMA Group, which earlier this year raised US$45m in a new financing round, for expansion and for investing in its in-house technology. The company recently opened its seventh Berlin property, the NUMA Arc, a boutique apartment house in Friedrichstrasse with 158 apartment units in seven different categories. The property was previously a 4-star hotel, the Angleterre.

NUMA Group CEO Dimitri Chandogin said of the latest opening, "Berlin is one of Europe's leading tourist hotspots and offers exceptional prospects for the NUMA concept. We see a demand-supply vacuum of up to 60 per cent in some of the metropolises.

"The owners of the former 'Angleterre' hotel recognised this market gap and the increasing interest in the asset class of boutique apartments compared to classic hotels. With NUMA, they have taken the step of a comprehensive reorientation of the accommodation offer, which has also had an effect on the design of the new apartments. We've succeeded in creating a home-like feeling with a new design, with convenient online check-in and check-out via smartphone, mini-kitchens and work desks with fast Wi-Fi, so ideal also for longer stays."

The Berlin-based NUMA Group also runs apartment houses in Munich, Rome, Milan, Madrid, Barcelona and Vienna. Earlier this year it entered into a joint agreement with LaSalle Investment Management to build up a new €500m portfolio of city hotels in the UK, Spain, Italy and the Netherlands.

LaSalle said the partnership "pays into the growing business area of "value-add investments", as the strategy of the two companies is aimed at the acquisition, refurbishment and operation of "city hotels, serviced and long-term flats, boutique hotels" as well as "conversion projects with existing or foreseeable vacancies from non-institutional or independent owners and operators in western European A-cities". The conversion time would be about six to eighteen months per property, with rooms being created "for short-, medium- and long-term stays, allowing optimal flexibility in occupancy".

NUMA will take over the development, management and operation of the properties, using its in-house technology, which aims to digitally cover as many areas of business operations as possible.