Serviced apartments - the investment landscape

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The serviced apartment sector has seen a flurry of investment activity over the last 18 months - a pattern which is set to continue as the industry is the focus of attention, and finance, from a range of sources including institutional investors, asset managers, commercial and residential developers, standalone serviced apartment operators and the major hotel chains.

The 2014 Serviced Apartment Summit in London saw a noticeable increase in investor interest, with the likes of Starwood Capital, Macquarie Bank, GIC Real Estate, M&G Real Estate and RBS in attendance. The Summit also saw the signing of acharter of industry definitions by many leading operators - a step towards improving both investor and consumer understanding of the sector.

In the UK, London is the sector's investment hub and is likely to witness a busy couple of years with plenty of capacity in the market. A Savills report from October 2013 said London has 1.6 serviced apartments per 1,000 business visitors compared with 5.7 for New York and 5.3 for Hong Kong.

Among the prime movers in the London market are US equity funds. Oaktree Capital has allocated a £300 million development and acquisition war chest to the newly established CL Serviced Apartments, while Patron Capital has already funded and sold serviced apartments in London and is looking for further opportunities. The forthcoming £121 million InterContinental hotel in Greenwich, funded by Queensgate Investment Fund, will also include the 23-storey Peninsula Tower offering 100 serviced apartments.

Adagio Aparthotels, a JV between Accor and Pierre & Vacances, will open two properties in east London by 2018. A 217-apartment property will open on Whitechapel Road in 2016 following the conversion of an office building called Black Lion House. The conversion of office buildings in to serviced apartments is likely to be a growing trend in London due to the lack of new-build opportunities and the strength of the residential sales market. In 2018, Accor will open Adagio London Stratford, a 137-unit new-build development on the Olympic Park site. Both developments will see Accor partnering with Union Hanover and EquityBridge Asset Management.

Union Hanover has also acquired 100 apartments from housebuilder Barratt London at its Great West Quarter (GWQ) scheme in Brentford. The purchase will result in the first extended-stay hotel under Union Hanover's Urban Villa brand opening in November 2014. The apartments were acquired on a 999-year lease and are in the landmark 25-storey tower on the 12.5 acre GWQ mixed-use scheme, which includes 800 homes, retail, restaurants, offices and a Novotel Hotel.

Also active in the London market is Cheval Residences. The Qatari-owned company (check) trades at the luxury end of the market, and is developer, owner and operator of all its properties. In the last year it has opened two London properties Cheval Three Quays, near Tower Bridge (155 units) and Harrington Court (50 units) in South Kensington.

There are a host of active operators in London, who own some of their inventory and lease the rest, including Marlin Apartments, Go Native and Think Apartments. Recently City Marque has announced plans to launch a propco to sit alongside its opco in order to implement synergies and cost savings.

Elsewhere in the UK, the lack of inventory is even starker.Edinburgh has 1.7 apartments per 1,000 business visitors, Manchester 0.9 and Birmingham 0.6. But the momentum is building across the country. Aberdeen has seen a mini-boom in serviced apartment development to cater for workers in the oil and gas industry.Adagio has announced the signing of a 146-apartment property in Edinburgh's Old Town. It is part of the £150 million New Waverley development, by Artisan Real Estate Investors. The Bloc Hotel in Birmingham's Jewellery Quarter is to be extended with 30 apart-hotel rooms aimed at business travellers.

In the rest of Europe activity is patchy but there are definite investment hotspots including Berlin, Munich, Frankfurt, Paris, Amsterdam, Barcelona and Rome. BridgeStreet Global Hospitality has announced a 10-year agreement with Short Stay Group in Amsterdam, the first member of its regional affiliate programme. And in Ireland, PREM Group has bought the historic Merrion Hall in Dublin and converted it serviced apartments in July 2014.

Outside of Europe it is China that probably has the highest levels of investment and development.

Singapore-based The Ascott Ltd is looking to reach a target of 40,000 units under operation worldwide by 2015, 12,000 of which will be in China . It is opening 12 properties in China in 2014. Ascott Limited has formed a strategic alliance with developer Beijing Vanke, a subsidiary of Vanke China, to drive its expansion plans in China. Beijing Vanke "will leverage its significant presence and expertise to develop serviced residences in China. Ascott will in turn provide its leading capabilities in managing award-winning serviced residences". Ascott has also bought an operational serviced apartment block in Hong Kong and will rebrand it to Citadines Mercer Hong Kong in Q3 2014. CEO Lee Chee Koon said: "One of Ascott's growth strategies is to look for prime operating serviced residences in gateway cities which will provide us with faster time to market."

Dubai-based Jumeirah Group has signed a management agreement with GT Land Holdings to operate 169 serviced residences in Guangzhou. The development is located in the centre of New Pearl City Tian He district in East Guangzhou, and will form part of an apartment and hotel complex, opening in 2015.

India is also a busy market with international and local operators partnering with Indian investors and developers. StayWell Hospitality Group has signed a management contract with developer VSR Infratech for a serviced apartments project in Sector 68 in Gurgaon, in Delhi NCR, and developer Assotech Realty has announced a 142-unit serviced apartment project in Sirdi. It will be the first in a series of serviced apartment developments in Indian pilgrim and business destinations. The apartments will be managed and operated by Sandal Suites, a subsidiary company of Assotech Realty.

BridgeStreet Global Hospitality has announced a 20-year, tri-party agreement with developers JNB Group and Homestead. BridgeStreet will provide property and facilities management for two new luxury residences by Homestead - Michael Schumacher World Tower and Ballet by Sharapova, both in Gurgaon. It has also signed a 10-year franchise agreement with Everlike Buildcon Pvt, a division of Silverglades, for Merchant Plaza in Sector 88 of Gurgaon. The 2.75-acre Merchant Plaza development is a mixed-use 192-unit property including 2.5 million square feet of serviced apartments, retail and commercial spaces.

The Gulf states are also set to see serious expansion. In December 2013, a Colliers International report said 10,000 additional serviced apartment units are needed to fulfill projected demand in Saudi Arabia, the UAE and Qatar.

InterContinental Hotels Group (IHG) has signed a 20-year management agreement with local conglomerate Al-Khorayef & Sons Co. for a 189-key Staybridge Suites hotel in Alkhobar. The property will be the first Staybridge Suites property in Alkhobar and the third to be announced in Saudi Arabia, joining two in Jeddah.

Local owner/operator DAMAC is investing heavily in serviced apartments and has launched Constella, the first fully certified Sharia-compliant serviced hotel apartments in Dubai. As well as developing, DAMAC has two serviced apartment management companies.

Dubai developer Deyaar has also launched its first serviced apartment scheme, The Atria. It will feature 219 residential units and 360 serviced apartments, scheduled for completion in the first half of 2017.

In south-east Asia, Singapore-based developer and investor Mapletree Group has formed a JV with Oakwood Worldwide and plans to to acquire and develop US$4 billion worth of serviced apartments. The JV plans to open more than 100 new properties around the world over the next five years, and will see Mapletree acquire a 49 percent stake in Oakwood Asia Pacific. Mapletree CEO Hiew Yoon Khong said: "This joint venture is an important step for us in our next five-year strategic growth plan. The joint venture will help Mapletree build our operational capability in the corporate and serviced apartments sector. This sector is another key asset class which we are confident of building into a world class platform with Oakwood as a partner."

Also based in Singapore, Frasers, which was launched in 1998 with 400 apartments now manages 15,500 units across 92 properties and says it plans to reach the 30,000 mark by 2019. Thai developer V.M.P.C. Co, is investing 6 billion baht (£113 million) to develop a serviced apartment and hotel development in Chon Buri's Si Racha district to tap rising demand, particularly among Japanese expats working in Thailand.

In Australia, Chinese real estate giant Wanda Group has bought the Jewel project on the Gold Coast. Wanda will jointly develop the project with its original owners and plans to invest US$900 million to build a five-star Wanda Vista hotel and serviced apartments.

In 2014, Australian developer/operators Meriton and Toga have spent a combined AUS$260 million on two Sydney sites earmarked for serviced apartments, while fellow Australian firm Quest develops up to 10 serviced apartment schemes annually, each valued at up to AUS$50 million and operates more than 150 properties in Australia, New Zealand and Fiji. Quest Apartments has appointed Goldman Sachs to find an institutional partner, to buy five of its serviced apartment schemes plus its future projects.

In the Americas, Extended Stay America raised $565 million in an initial public offering. It was bought for $3.9 billion at a bankruptcy auction in October 2010 by a consortium including members of hedge funds Paulson & Co, Centerbridge Partners and private equity firm Blackstone Group. Blackstone and Paulson each hold around 27.8 per cent of the company, which owns and operates 682 properties in the US and Canada.

Best Western International has revised its plan to enter the extended-stay hotel market, revealing a new concept for the sector. The company previously planned to launch a range of properties which combined extended-stay and traditional hotel rooms, but this has been shelved in favour of a new 100 per cent extended stay concept.

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