Hospitality Development Scenario: Limited Service vs. Full Service

The global hospitality market has recently seen a plethora of innovative and increasingly sophisticated hotel concepts become available. Already well-established in America and Europe, over the past few years, select-service hotels and limited service hotels have emerged also in Asia as an attractive investment opportunity for developers and operators. 

WHAT IS A Select-Service Hotel?

To some developers, the three star category is often erroneously identified as inferior, smaller, less interesting or budget oriented properties which fail to be an attractive development option. International Select-Service Hotels are also often mistakenly confused with three star family hotels or two star properties, which are the small sized family run mini hotels at the budget end of the spectrum. 

The International Select-Service Hotel model however, is a well-planned lodging structure with a specific focus on maximizing the comfort of guests, affordability and value for money. Key category success factors are consistent approach and smart design for efficiency in construction, design and operation. 

The properties within this category tend to be developed by experienced developers with early engaged operators. Optimal operational efficiency is through at least 150 rooms and where market conditions allow, larger properties gain better GOP margins.

Location plays an important role in the planning of Select-Service Hotel with easy access to restaurants and retail key advantages. Select-Service Hotels can play an ideal role in providing complementing accommodation to midscale retail complexes, Grade B office complexes or through supporting industrial hubs.

Design Features?

• Design is a more critical aspect in the select/limited service model than full service properties if the ultimate investment goal is high GOP margin. Developers in several cases fail to understand that the true profitability of this model is not in higher rates but in operational cost control, which is highly related to design features.
• Room size and type. These are typically 18 sqm to 24 sqm, dependent on positioning and land cost. Resort locations tend to require more space and in certain cases, rooms could be up to 26 sqm. One room type would save overall costs but with corner rooms possible, larger options may be offered.
• Multi-tasking staff. To maintain profitability, staff numbers kept at a minimum makes multi-tasking a cost effective solution. Check-in process is often semi-automatic and reduced to a limited timeframe. Front desk staff then become free to conduct housekeeping inspections and help with F&B. If allowed by the property design, front desk staff also serve breakfast, which is a feature provided by certain well-known brands. Luggage is carried by the guests and trolleys supplied if needed. Outsourced staff is a common option in high occupancy periods.
• Breakfast area is the only F&B outlet. Limited or Select-Service Hotels tend to limit F&B facilities, providing only a complimentary breakfast, or as its sometimes offered, a ‘grab & go’. Food selection is limited but oriented in quality rather than quantity. Sometimes the breakfast corner is integrated within the reception area and staff perform both service functions. If the breakfast space is located far from reception, a separate room is provided that is closed after the breakfast period and re-opened the following day.
• Light on facilities. Select or Limited service models cut on what is not strictly necessary such as spa and meeting spaces. However, small meeting rooms could be added. Gym is still a must in the majority of the cases, but limited space is requested. Reception and luggage rooms are typically much smaller than Full Service Hotels. Swimming pools are not an option but should be added for leisure destinations. Automated services are often added to offer full comfort to the guests such as laundry area, for instance, with laundromat and ironing boards, which allow guests to do their own laundry at a lower costs. Vending machines are often utilised to offer 24/7 F&B options.

Allowing 10,000 sqm of available gross space, a typical program for a midscale Full Service Hotel compared to a midscale Select/Limited Service Hotel is shown below.

WHY CAN These Models Be Good Investments?

From a performance point of view, Select/Limited Service Hotels have fundamental differences in operating costs. A typical operating strategy for Select/Limited Service Hotels would make use of: 

• Outsourcing
• Multi-task staff
• Limited room amenities, no minibar and no room services. 

F&B is reduced to breakfast only, which contributes higher operating margins than full service where F&B costs can be 50%-60% of F&B revenues. Typical operating costs of Select-Service Hotel against Full Service Hotel is follow: 

Below is a simulation of stabilised performance of a midscale full service hotel and a midscale limited service hotel with the same number of keys.

Operational profitability is the key success factor for select/limited service hotels. Properties can reach 50%-60% GOP margins, much higher compared to the full serviced properties. This allows Select/Limited Service Hotels to have greater adaptability to volatile market conditions as they easily adjust rates for low season or when the market trends down or increase when the market allows.

Savings in manpower with limited required staff numbers per room. In highly efficient scenarios, this model only requires full time front office and reservation staff and a property manager. Marketing and accounting can be outsourced or centrally managed and housekeeping and maintenance supported by external providers.

Net operating profit is not the only reference for IRR, construction costs are also a key consideration in the choice of Full Service against a Select/Limited Service Hotel. Full Service Hotel build costs are generally higher per room, considering the facilities, public areas and back of house required by the business model. With strong performance metrics and lower construction costs, Select/Limited Service models can generate very attractive returns.

WHAT ABOUT A Double Brand?

In some cases, when there is a generous maximum GFA available but market conditions not quite ready for a large scale full services hotel, then developers may consider to fit more hotel types in a given building. Such projects are typically managed under one single operators covering multiple brands. A popular trend is a combination of an upscale and midscale brand in the same building or serviced apartments and a short-stay hotel. 

The movement to dual-branded hotel to capture a broader client base through various price points is gaining developer interest.

In addition, sharing the back of house and building maintenance costs is an interesting value proposition. Each hotel usually has a separate entrance, reception and check-in desks and in certain cases, recreational areas and meeting facilities may be shared.  The issues related to this structure are in careful execution of design and market positioning where the lower category could negatively affect the upper category’s price point, especially with shared facilities.

We believe the Select and Limited-Service Hotels categories are an interesting development proposition for real estate developers and investors. Ease in execution and management allows also first time hospitality developers to enter the market with what could become a very competitive product. These categories may also successfully address market volatility problems. Key success factors are in careful business planning, design and professional management and facilities mix. To get it right, developers will need to engage the correct execution team from the start.