According to the latest UK Serviced Apartment Report from international real estate advisor Savills, the lack of purpose built stock in London could be creating an investment volume deficit.
The firm reports that investment in serviced apartments in the US totalled £1.3 billion, 12% of total US hotel sales seen so far in 2013 – compared to only £123.5 million in the UK, 5% of total UK hotel sales. The dearth of standalone blocks with the appropriate consent in the UK means that investment activity remains highly constrained.
Savills predicts significant development expansion over the next five years could mean that serviced apartment investment volumes increase in line with that seen in the US where it accounts for 12% of hotel volumes.
Significant potential for growth in the UK market
Tim Stoyle, head of hotel valuations at Savills, comments: “The US is a bigger market so like for like comparisons are difficult, but the dramatic difference in volumes does demonstrate the significant potential for growth in the UK market. New investors to the sector have recognised its investment potential and are committed to expanding purpose built stock.”
It’s not just London that has capacity for expansion according to the firm. Supply in the key regional cities per 1,000 business visitors is even more constrained with Birmingham having the lowest relative supply of 0.6 units. However, further growth would need to be approached cautiously due to the shorter lengths of stays typical of business visitors outside the Capital.
Movement towards C1 (hotel) consent
Marie Hickey, associate director of research at Savills, states: “The increasing movement towards C1 (hotel) consent when it comes to expanding stock will help to legitimise the sector and boost future investment. Previous expansion was largely driven by the acquisition of standard residential (C3) units, typically part of larger residential blocks, through leases and or management contracts. In London this has posed a risk to operation as C3 properties cannot be let for periods of less than 90 days.”
Development of branded offerings
The bulletin states that the aspiration of serviced apartment operators to develop their own branded offerings looks set to be realised with the entrance of new investors. For example, the tie up between Go Native and the Palmer Capital backed Danescraft will see Danescraft redevelop sites and Go Native taking the units through either a lease or management agreement. For others it will mean the creation of new owner-operated brands, as with Oaktree Capital’s £300m allocation to the newly established CLSA to develop a portfolio of serviced apartment operations across the UK.
Revenue and occupancy growth
Savills notes that RevPAA (revenue per available apartment) growth hit 16% this year, far exceeding that seen in the hotel market where RevPAR growth has averaged 4.1% over the same period. Occupancy also improved over the first half of 2013 with Q2 occupancy up 1.3 percentage points year-on-year, with rates up 3.6% over the same period.
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