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Boutique hotel operator Firmdale's serviced apartment in London
HVS has conducted a new survey which shows that serviced apartment operators in the UK and key parts of Europe seem to getting more creative with their product offering as they grow their portfolio.

Recent additions to the sector showed that some have added more common spaces with communal dining areas at the expense of in-room kitchens, marketing them as a more affordable experience (or microapartments).

The branded serviced apartment sector is getting more crowded. Almost every established hotel group now has an extended-stay product.

HVS's analysis of Gross Operating Profit (GOP) margins revealed some impressive results. Nevertheless, the bandwith of GOP margins remains broad, confirming that some properties operate less profitably.

The serviced apartment pipeline remains strong and focused on Western Europe. As brands get more traction, new projects increasingly also appear in secondary cities and new markets. Franchising aids expansion; however, only the larger companies have so far relied on this while many groups manage, own or lease their properties.

Transaction evidence for serviced apartments exists but remains limited and often with little transparency in terms of the sales price. However, institutional investors are entering the sector, eyeing mostly brands with a solid track record.

Overall, the performance is encouraging in light of recent political events. The UK Regions and London recorded marginal growth in occupancy in 2016 and average rate growth of 3% and 4% for London and the regions, respectively. The devaluation of the pound in H2 2016 may well have helped the average rate, making the UK more affordable to European and US travellers.

The outlook, however, remains more modest; flat growth is forecast for the regions and London’s serviced apartments are aiming at another 3% growth in average rate in 2017. The UK’s decision to leave the European Union could affect certain serviced apartments in the longer term, especially those focused on the corporate market, some of which may choose to move away from London eventually. However, it is too early to jump to such conclusions.

The UK and Germany lead the pack in Europe, accounting for 41% and 32% of the pipeline, respectively. While London is the top spot for development in the UK (44% of the UK pipeline), Manchester, Edinburgh and other regional cities will also see openings in the near future. It appears that brands with a large presence in the UK are now venturing into Ireland, where development activity is heating up in Dublin.

In conclusion, the serviced apartment sector is steadily finding its place in the investors’ community as the pipeline is larger than ever and increasingly including secondary and tertiary markets as well as countries where the concept is somewhat novel.

Survey results confirm that this product can be operated very efficiently with high GOP margins, a result of low staffing levels and few additional services. Nevertheless, more ‘hotel’ type services, such as open lobby or communal spaces, may become popular in the future.

The high profitability, combined with the fact that many guests today recognise the benefit of apartments (in terms of size and pricing) bodes well for the continued growth of the serviced apartment sector.

(source: HVS)