Hospitality development scenario: Hotel versus Serviced Apartment

With the steady growth of business travel and changing accommodation trends, serviced apartments are becoming an appealing alternative to other forms of lodging property investment. There are substantial differences from typical hotels but there are also several similarities. We have illustrated in this paper what developers should consider when making decisions about the development of hotel and serviced apartments.

THE DESIGNATION

Hotels have a clear business designation. There are different ways to classify hotel types, such as by target customers (business or leisure oriented guest), by positioning (economy to luxury) or by level of services (limited service to full service). However, they all have a clear designation in term of guest’s length of stay: “short-term”. With the exception of the extended stay model, the majority of the hotels are well equipped for accommodating shorter term stay, one or a few nights, with less focus on the need of visitors planning to stay for an extended timeframe. Serviced Apartments, in their basic form, provide an option for lodging guests requiring a home-like environment, with the aim of increasing comfort for longer term visitors.

DESIGN FEATURES

• Larger Rooms – typically from 32 sm to 45 sm for Midscale brands or Aparthotel and more than 55 sm for Upscale brands.
• Cooking Area – Serviced Apartments typically require a fully equipped kitchen or at minimum a kitchenette corner.
• Reduced Front of House – the reception is typically much smaller compared to a Hotel with scaled down lobby area and luggage space.
• Reduced F&B Space – in the Midscale segment of Serviced Apartment, food offerings are usually limited to breakfast. In certain cases, the F&B offerings can be turned into a “grab & go” concept and integrated in the multi-function reception area. Outsourcing F&B could also be a preferred option.
• Reduced Facilities – some offerings such as spa, meeting space and executive lounges are typically not necessary in Serviced Apartments. A swimming pool could be offered and a gym remains a must.
• Social Space – it is important to create social space for guests to interact and socialize. More frequently in Upscale properties, a library, pool area or gaming area is often added as part of the social space. Kids club is also a good inclusion for families. Developers need to cater for the needs of the new business traveler type as they often socialize as well as engage with local community during the business trip.
• Guest-use Public Areas – this is where it gets interesting. Particularly in the Midscale category, in order to reduce the operating costs but still offer full comfort to the guests, developers often provide automated services. Laundry area, for instance, with laundromat and ironing boards, allows guests to do their own laundry at lower costs. Vending machines are also often used to offer F&B choices 24/7 when a reliable service provider is available.

THE NEW TYPE OF CLIENTS

Historically, the serviced apartment concept was developed to cater to corporate travelers who require comfortable space during short to medium term assignments, as well as to those in the process of relocating and requiring interim accommodation. However, over the past few years, in the search for higher yield, the serviced apartment business has been innovated, with the effort to revise the traditional long term model to be able to capture not only medium to long term guests but also short term transient guests. With the expansion of “home stay” concept, through new peer to peer platforms like Airbnb, travelers are now open to the idea of “non-hotel” and Serviced Apartment which are gaining more popularity. Condotel and Apart hotel have also been getting momentum in terms of guest curiosity on the product types and willingness to try.

Currently, there is a shift of focus from the traditional serviced apartment operators to short term guests as they attempt to apply a cap to long term guests and slowly develop a higher proportion of short term guests. However, considering the differences in facilities and operational characteristics, questions arise as to whether it is possible.

THE OPERATORS

Serviced Apartments have always been a very niche market for management companies. Numerous hotel operators do not have a specific serviced apartment brand but rather use a well-known brand with a slight modification to the name, for instance Novotel Suites or Holiday Inn Suites. However, as this sector evolves and demand increases some international hotel operators started to create specific brands to target long term oriented properties, for instance, Executive Residency by Best Western or Shama from Onyx Group. There are operators that are specialized in Serviced Apartment such as Frasers and Ascott. 

THE KEY FOR HEALTHY IRR

From a business point of view, Hotel and Serviced Apartments have fundamental differences in operational revenues and costs. Hotels are typically able to achieve higher rates per room, due to the intrinsic characteristic of short term business. In addition, hotels achieve higher income from other sources, including F&B and ancillary. From the other side, the occupancy of Hotels is much more volatile and operating costs are considerably higher. Therefore, Hotels have higher revenues but higher costs, the questions is, what about profit? Below is a simulation of stabilized performance of an upscale Hotel (4+) and an upscale Serviced Apartment with the same number of keys.

The above example is a hypothetical case of how long term vs. short term stay affects the return. However, the majority of the Serviced Apartments now, as stated previously, are shifting their attention to shorter term guests. This will increase revenue but also require more facilities, more staff and therefore more costs, going closer to the typical Hotel model.

Serviced Apartment GOP margin is heavily dependent on the choice of targeted clients, positioning and facilities offering. There is a lack of transparency in term of benchmarking of operational data, however, from our experience, the GOP margin range in the next table can be a source of reference. Net Operating Profit is not the only reference for IRR, construction costs also play a very important role into the choice of Hotel vs. Serviced Apartments.

Hotels are generally a much more expensive investment per room basis, considering all the public space and back of house required by the business. Serviced Apartments could be very cost effective to build, if the intention is stable longer term guests with limited facilities but, again, modular design and efficient use of the space would be a key for reducing costs. If asked what is the other important factor to reduce costs the answer would undoubtedly be, the “Correct Planning” before design commences. In our experience, if the business model and area program are well set and approved from the beginning then the developer, investor, designer, management company and contractor are all on the same page from start to finish, and that is the best way to save costs. Finally, related to performance, market studies will be an important part of the planning work with correct analysis about market volume for long term stay. The Developer should be well aware that Serviced Apartments are less suitable in destinations with weak corporate demand.

Read more:

Condotel: The cautious optimism of hospitality market
Hospitality Development Scenario: Limited Service vs. Full Service