Private equity investors are injecting more than just capital into Europe’s serviced apartment sector; they’re also influencing the way it operates, changing the way the sector evolves.
As more high-profile operators enter the market and more data becomes available, confidence in the serviced apartment concept is increasing – and investment is rocketing.
Investment volumes in the UK, for example, stood at £486 million in the year to May 2018, up from £89 million in 2010. In the short-term, the serviced apartment sector is expected to grow at a quicker pace than hotels, JLL research suggests.
Private equity buyers have been leading the charge, with the sector offering attractive returns and the opportunity to build scale through portfolio deals.
“Private equity buyers, many of whom are already established hotel investors, are willing to inject more capital and take the risks that other investors are less likely to,” says Eva Chan, from JLL Hotels and Hospitality EMEA Research team. “With lower running costs than a staffed hotel, the serviced apartment sector also offers the opportunity to redevelop and to renovate to deliver higher returns.”
A growing sector
After an initial period of single-asset sales, portfolios are now attracting an increased number of bids prior to sale, proving that the sector has matured into a viable investment product, says Chan.
While Starwood Capital’s purchase of Think Apartments in 2015 showed that large private equity buyers were taking the sector seriously, Brookfield´s purchase of SACO Apartments, a portfolio with a pipeline for expansion, this year highlighted the increased demand among bidders.
“A large number of rival bidders is also evidence of confidence in the sector,” says Sally Kendall, from JLL Hotels and Hospitality. “The two deals really sent a signal to the market.”
The UK and Ireland have led the way, according to research by JLL, with investment last year five times that of 2010 with around 22,000 units in operation. Cities which attract large number of business and leisure tourists such as Edinburgh and Manchester are prime locations, with high occupancy and rising revenue per available room (RevPAR). Chan attributes this to the UK’s familiarity with the serviced apartment concept itself and the opportunity to pair up with professional, branded operating companies.
“The UK has the biggest supply of serviced apartments in Europe,” she says. “It’s a very solid market and got to grips with the rising demand from guests much sooner than its European peers.”
Germany close behind UK
Other European countries are also building their serviced apartment sectors. Germany, with some 11,400 units and about half that figure again in the pipeline, may be Europe’s second serviced apartment market. But the sector remains fragmented, with small private operators and international brands, such as Adina, Residence Inn by Marriott and Adagio, co-existing in the market.
Unlike the UK, institutional investors made up around 45 percent of the German serviced apartment investment total last year.
Just a quarter of the country’s apartments are branded – something that needs to change if the sector is to gain scale. Investors, she says, are likely to focus on international brands in the short term.
Addressing the challenges
One significant issue for investors has been the lack of data which impacts their ability to measure the sector’s performance, Chan says. However, operating performance data is now available for certain markets and the availability of research is improving.
Its high profit margin, stable cash flow, as well as conversion flexibility and lower development cost, could make the sector increasingly appealing to institutional investors.
Click to read more about how debt funds are poised to fill the financing gap in hotels real estate.