Serviced apartments: a growing real estate asset class in the European alternative accommodation space

A fair example to illustrate this change in demand is Airbnb being today the highest-valued hospitality brand in the world, worth more than Marriott, Hilton and Hyatt combined. Among the underlying reasons behind the huge shift in favour of apartments vs. hotels is the prevailing millennials’ preferences, the greater autonomy offered to families and groups, and a more flexible environment when it comes to the need to social distance.

However, the supply of apartments is often highly fragmented, non-scalable and non-compliant with regulation. Indeed, as a result of the boom that Airbnb represented and the undesireable side effects of the phenomenon (such as gentrification and tax evasion), many city governments and municipalities both in the US (New York, Chicago, San Francisco) and Europe (Amsterdam, Berlin, London, Paris, Madrid, Barcelona, etc.) are reacting and imposing restrictions to unregulated properties, in an effort to reduce the listings of non-compliant apartments in the market.

And this is where the opportunity lies for those professional serviced apartment platforms which are now beginning to flourish in this space.

A blended asset class – Proptech – somewhere between hotels and residential

The serviced apartments segment has proven to be a super-defensive asset class with a privileged flexibility. At low demand days, apartments can host mid-term stays with impressive occupancy rates (close to those of residential assets), while on high demand days, they would focus on shorter stays in order to maximize ADRs and deal face to face with hotels. Even those with a fragile memory would easily find evidence for this, as one needs to look no further than recent lock-down periods during the pandemic to understand how resilient apartments can be, even without the expected recovery to come in tourism at some point.

In addition to this, there is another relevant secret ingredient to add: technology. Many of the tech-based operators are already using it as a service to reduce costs (personnel, utilities, etc.) and to reduce the carbon footprint of the buildings, thus complying with ESG targets in the properties – not a minor aspect these days. Additionally, the use of disruptive digital marketing and online positioning tools by the operators contribute to enhanced profitability through reduced customer acquisition cost and revenue maximisation.

So far London is the European city with the largest stock of serviced apartments units, followed at a considerable distance by other key regional cities such as Munich, Istanbul or Dublin. According to Savills, stock expansion is set to accelerate with supply forecast to expand by c.21% in Europe over the next three years, as demand keeps growing driven mainly by greater consumer awareness on the asset class.

Yet there is a significant gap between Northern and Southern Europe. While dedicated property owners (such as Staycity, Edyn and Accor) are already present in UK, Germany and other Northern regions, most of those are still in their initial phase of exploring relevant tourist markets such as Spain, France or Italy. In other words, room for future expansion in Southern Europe is huge and the widespread view is that this will happen imminently as operators in this region expand their activity (eg. Libere, Sonder, Limehome or Bob W).

The institutional appetite to further accelerate

Smart money from institutional funds is increasingly looking at the sector, attracted by the expected higher returns, relative to hotels and residential assets or platforms.

With regards specific assets, expansion of future stock will certainly provide more acquisition opportunities. In addition to this and on a larger scale, for those investors seeking more meaningful exposure to the sector, investments into existing platforms are already taking place. As was the case with the recent acquisition of the renowned Edyn (formerly Saco) by Brookfield and the stake acquired by both APG and Aware Super in the Propco-Opco platform City ID in 2020. Therefore, it would not be surprising that other first-mover platforms in their regions (such as All Iron RE in Spain) step up their efforts to aggregate a critical size of units with proved returns in order to attract institutional money into their cap tables.