At your service - partnerships with residential developers

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Since the growth of the private rented sector - where residential developers build properties and then effectively become landlords - housebuilders have become familiar with the concept of retaining properties on their balance sheets rather than selling them as quickly as possible upon completion. So could the burgeoning serviced apartment sector - which falls between private rentals and the hotel market - be the next logical move for developers who want to diversify their business and open up alternative revenue streams?

Certainly, there is a feeling that the sector is on the threshold of serious growth, with Savills claiming 2013 is the year that "serviced apartments evolved as a recognised sector in the UK". A Savills report published in October 2013 said the sector "has been formed of a blend of corporate housing (standard housing provided with short stays with no services), serviced apartments (short stay housing with services) and aparthotels (more akin to hotels with kitchenettes)."

The Savills report doesn't mention the leisure user, but at a recent event in Manchester organised by Serviced Apartment News, a spokesman for Think Apartments, the largest owner/operator of serviced apartments in London with a portfolio of more than 750 units, said that their customer base is split roughly 50/50 between corporate and leisure users.

So, could housebuilders and serviced apartment operators become potential partners to grow the sector? One person who definitely thinks so is John Wagner of Cycas Hospitality. A 30 year veteran of the hospitality industry, Wagner's company operates serviced apartment blocks in London and Liverpool, both of which are badged with InterContinental Hotel Group's Staybridge Suites brand.

Wagner says: "Residential developers already know how to build apartments for a good price, and a serviced apartment hotel requires very little more than a modern block of flats. If you ask someone 'How much is that flat to rent', and the answer is £1500 per month, the answer is often, 'Wow, that is expensive'. Ask the same person, for the same flat, 'how much is that hotel room?', and the answer is '£60 per night', the reaction is 'Wow, how can they do it for such a cheap price?'. Once residential developers understand the economics of the serviced apartment segment, I believe they will be open to alternatives to their traditional model."

Stephen Hanton, chief executive of SACO, a global serviced apartment operator, also sees considerable potential: "With the continued increase in demand from corporate and leisure sectors for serviced apartment products, residential developers are becoming acutely aware of the opportunity to develop and let or manage in this market. The physical product, in most cases, resembles that of residential apartments but is supplemented by additional storage, administration and reception facilities and affords developers a number of options. Typically developments have been retained with a guaranteed rental income or sold off with fixed returns for a number of years and with an exit back into residential if required."

He adds: "As the market matures however, purpose built, designed serviced apartment blocks, which may well feature smaller unit size and additional amenities such as a gym or outsourced coffee shop, are being developed with a view that the property remains in commercial, rather than residential use. Desired locations follow traditional high hotel demand markets and business areas with an extended stay or project base but, as with the product, this will modify to secondary locations and, indeed, high traffic areas such as airports. Equally, the more traditional residential product will witness the growth of a 'serviced apartment Lite' concept based on the North American 'concierge' model, where premium rental rates will be accessed by offering long leases but with the benefit of a dedicated on site facility management and front desk team able to offer a wide range of services from shopping, housekeeping, maintenance, concierge and more. Critical in the success of the property will be design, location, the right lease or management agreement and, most importantly, identifying operators who can join up hospitality and development, minimising costs and maximising service, yielding and ultimately returns."

Think Apartments owns the vast majority of its London units, but it has recently announced ambitious expansion plans which cover major cities across the UK. It is in the early stages of discussions with housebuilders over working together. The company says the move is taking advantage of the additional benefits an apart-hotel development can bring including lower construction and fit-out costs when compared with a hotel, "future-proofing" with relatively easy conversion to residential and the fact that Think Apartments will take a lease, which is attractive to lenders. Spokesman David Curtis-Brignell says: "It is essential for housebuilders thinking of taking a step into serviced apartments to work with an experienced, established UK operator. It's a simple case of doing what you do best - Think Apartments are an excellent partner for anyone thinking of going down this route. Think can provide a full-service hotel management platform to owners, create fully supported feasibility studies including business development plans, and can identify local and international requirements for suggested inventory and facility mix. We will review space-planning to refine a building's efficiency and operational effectiveness and write or assist with pre-opening budgets, financial forecasting and other associated activities."

A potential fly in the ointment is planning classification. To be able to rent a property for less than 90 days, a C1 hotel usage is needed, rather than  a C3 residential usage. There is however significant lobbying going on behind the scenes from operators and consultants. Eric Jafari, CEO of BridgePoint Ventures - which is launching its Urban Villa serviced apartment brand - explains: "There will be tightening in the planning regulations as the use of C3 residential units as C1 serviced apartment units is estimated to account for a large percentage of the serviced apartment use in the UK currently. This was caused by a fragmented underdeveloped market that took advantage of the recent residential downturn. As the resi market continues to strengthen, a number of these units will now be sold. In regions where short letting is highly viable (such as London), people will continue to let C3 residential units for less 'than 90 consecutive nights' which contravenes their planning use. We believe that this form of operational model will eventually be at jeopardy of catching the attention of the local counsels and bear the risk of being shut down. The reason for this is because by letting a residential unit as a short-stay, some operators are avoiding paying corporation tax and business rates."

Having a C3 classification can actually be a positive for housebuilders and developers wanting to retain their units however. Sovereign Housing Association - one of the UK's biggest developing RSLs - owns two serviced apartment blocks, both of which are managed by SACO. James Gibson, regional development director, says: "We purchased the blocks because we saw them as a good investment opportunity. They both have resi consent, so we have an exit strategy in line with our core activities, and have the potential to switch them back in to use in the private rented sector should the need arise. They are operated for us by SACO on a five-plus-five year lease deal, and at the moment they are performing well so we anticipate the leases running for the full ten years. They are both in locations that we would look to acquire properties for the private rental or shared ownership markets, and they were opportunistic purchases. The Bristol property, Quay Point, was bought from receivership and we very much looked at it as a long term investment. It has a fairly interesting mix of corporate and leisure clients and played host to David Hasselhoff while he was appearing in pantomime in the Bristol Hippodrome, which is nearby! Cricketer Muralitharan and his entourage have also stayed there. The Bath property is very popular with overseas students, particularly from China. In many cases their parents have been looking to buy them an apartment but for whatever reason that hasn't happened, and a serviced apartment is very much seen by them as the next-best option."

One of the reasons that there is heightened expectation surrounding the serviced apartment sector is that the space has recently seen the hotel and apartment operators joined by serious cash in the form of institutional investors. The last year has seen US fund manager Oaktree Capital allocate a £300 million development warchest to the newly established Central London Serviced Apartments (CLSA). Cycas Hospitality's Staybridge Suites developments were funded by another US fund, Patron Capital. Interestingly both funds have also acquired UK housebuilders in the same period. Oaktree now owns Countryside Properties, while Patron is a part-owner of CALA Group.

Paul Rands, director of international development at BridgeStreet Worldwide, which operates more than 50,000 units in 60 countries, says: "Developers will react to market demand, both from occupiers and investors. There is increasing interest in the sector from the investor market and the occupier demand remains strong, so the ingredients are there. Availability of funding remains key to developments getting off the drawing board, so closer collaboration between the money and parties involved will see more schemes developed. The funder's strategy may therefore influence a closer collaboration between housebuilder and operator but only if the economics stack up."

One thing is for certain, the buzz around serviced apartments is only going to increase as the sector becomes more established - housebuilders have an exciting opportunity to get involved in the sector while it is still in its relative infancy.

Number crunching*
• Prime yields for serviced apartments in London are in the region of 5.75% to 6%. Prime regional yields are 7.5% to 8%.

• Revenue per available apartment (RevPAA) grew 12.7 per cent in London in Q2 2013, far exceeding the 5.4% growth in revenue per room (RevPAR) reported by hotels.

When compared with other global centres, UK cities are seriously undersupplied with serviced apartments. London has 1.6 serviced apartments per 1,000 business visitors, Edinburgh 1.7, Manchester 0.9 and Birmingham 0.6. This compares with 5.7 for New York and 5.3 for Hong Kong.
*Source: Savills

This article first appeared in the November issue of Show House, the leading trade title for the UK residential development sector.


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