Diversification and risk sharing with serviced apartments

Jan Winterhoff By Jan Winterhoff
Uploaded 08 October 2018

In the second of a series of reports from Germany, Jan Winterhoff, director of hotel development at GBI AG, describes how project developers survey site conditions and why Mixed-Use is a good concept for the future.

This week, important decisions will be made in Europe on how the hotel market, and in particular the extended stay segment, will develop. On Wednesday, the Annual Hotel Conference, one of the most important conferences and discussion platforms for the lodging market, will start in Manchester. And today, Monday, the Expo Real, Europe's largest B2B trade fair for real estate and investments, will open its gates in Munich with GBI AG participating.

Expo Real is increasingly becoming the focus of the extended stay sector as the German market has developed into one of the most important markets for the segment in Europe. Apartmentservice, a consulting office, anticipates the development of around 13,800 new units by 2020, corresponding to a market growth of 42 percent. At the same time an analysis made by Acomodeo showed that customers can save up to 55 per cent when booking serviced apartments for long stays compared to hotels.

But, especially among business travellers the knowledge of the benefits is not deep enough, the offer is seen as confusing and the market as too fragmented as the analysis stated. The further potential for professional branded extended stay operators is shown by another figure: According to the survey by Apartmentservice, the market share of branded extended stay businesses is only 34 percent in terms of units. Furthermore, within fast growing and competitive hotel markets extended stay brands offer clear positioning. So there is a lot happening in the segment.

When GBI AG - meanwhile Germany's largest hotel project developer - entered the extended stay market in 2006 by developing the first Citadines in Munich (opened 2009), the situation in Germany looked quite different. There were hardly any professional accommodation concepts for longer stays. A data basis with relevant KPIs of the segment was also missing. That made it hard for financiers and investors to understand the product although the potential of the segment was obvious.

While in Great Britain, USA and Asia extended stay offers had already been standard, the market in Germany was still underdeveloped. However, all this has changed rapidly over the past years. The established hotel groups, many consultants, other project developers and investors are observing the market in Germany very closely. Separate research categories for the extended stay market have been established; market transparency and thus the appeal of the product for financiers and investors are constantly increasing.

Further projects in the pipeline
Today, GBI is a pioneer in Germany for developments in the extended stay segment. In recent years, Citadines projects have been developed in Frankfurt and Hamburg, Capri by Frasers in Frankfurt and Leipzig, Adina in Frankfurt and Düsseldorf. GBI's own long-stay brand SMARTments business today counts six locations in Germany and Austria and is operated by an own management company. The properties have been developed and built by GBI and sold to institutional investors. The interest of the institutional investors underlines the attractiveness of the segment. 

Prior to starting a project, GBI AG examines carefully whether it is suitable for a hotel, serviced apartments or a combination of both. As part of the project evaluation for an extended stay product, in particular the following aspects are analysed in addition to the usual market and local factors:

• Does the socio-economic development of the location in terms of household size, commuter flows, demographic trends or the situation on the labour market prove that serviced apartments are being needed?
• Does the local economy require temporary accommodation for employees?
• Do national and international companies operate at the location, performing project work at the location on account of their size and sales volume, for which staff travel?
• Does the situation on the housing market and the rent level for one-room apartments indicate whether further demand will be absorbed by existing real estate?
• How is the already established hotel industry positioned in terms of quality, number of rooms/volumes and pricing strategies?
• Is the micro-location of the property suitable for longer stays - also in terms of leisure opportunities in the neighbourhood (restaurants, retail, etc.) including quick accessibility of the city's points of interest?

Hotels and long-stay properties benefit from mixed-use projects
GBI sees a meaningful combination especially when mixing a hotel with an extended stay product. For example, at a current GBI development of SMARTments business in combination with a Holiday Inn Express in Mannheim or an Intercity hotel in Heidelberg in conjunction with extended stay product. Not to forget the increasing interest of established hotel chains in double-brand projects: looking e.g. at a Residence Inn opened in 2012 in tandem with a Courtyard by Marriott in Munich, both operated by the SV Group from Switzerland. Or a double brand of Cycas Hospitality mixing a Residence Inn and a moxy in a single tower in Amsterdam Houthaven. As it happens, Cycas is also just entering the German market being long-stay and mixed-use experienced, SV-Group is opening the next double brand in Frankfurt.

In the future, we will see many more projects of this kind in Germany. They offer the developer the opportunity to implement large volumes, often making projects even possible in the first place. The operator has the opportunity to position various products on the market and to control them operationally. The owner achieves diversification and risk spreading within a property.

Investment giant buys serviced apartment brand
The potential of serviced apartments proved to be highly impressive again when the investment giant Brookfield bought the British company Saco for around 483 million euros last year. A Saco property under the design brand The Locke is currently being developed in Berlin. Saco projects are also being planned in Munich, Frankfurt and Hamburg. And the German market is getting even more dynamic with the rollout of new international serviced apartments brands, for example the market entry of StayCity from Ireland. StayCity will debut in Germany in 2019 with the first property of the all-new The Wilde brand in Berlin. Also the Accor and Pierre & Vacances brand Adagio is expanding in the German market with a freshly designed product. Hyatt House will open in Eschborn and Frankfurt, IHGs Staybridge is securing locations as well.

And Germany has a speciality - not only major cities are attractive locations for extended stay. Thanks to the de-centralised structure of Germany's economy, there are a lot of promising locations outside the Top7 that offer significant potential; this applies to both the hotel industry and the extended stay segment. Actually, this is just the beginning of a wave of further projects that will change the market decisively - and we are looking forward to this.

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