In past years, business travellers might spend weeks at a time in hotel rooms, or even rental accomodation for longer contracts. The last decade, however, has seen the rise of serviced apartments, offering a happy medium between the two, at a cost that compares extremely favourably with hotel rates.
Serviced apartments have been so popular that supply simply cannot keep up with demand, so they can be an attractive prospect for entrepreneurs and investors, but what are some of the challenges facing serviced apartment operators?
Competition from hotels, rentals and home-sharing
Competition new and old
The two primary sources of competition, as mentioned, are hotels and rental accommodation. When it comes to hotels, the primary source of the competition is a sort of identity crisis within the serviced apartment industry, especially with regard to price on shorter stays. Hotels, at the end of the day, offer a higher level of service than serviced apartments can or should, but serviced apartments also need units to be bookable for longer periods, or else they lose to rentals. With shorter stays, serviced apartments may only beat hotel prices by 10%, leaving them much less attractive propositions.
More recently, home sharing services like AirBNB have fragmented the market somewhat as well, offering a similar service to serviced apartment operators at a competitive price. This is often seen as a split in the serviced apartment industry rather than a strict competitor, though.
The cost pressures facing operators
The costs
Costs, both startup and running costs, are a major hurdle for operators of serviced apartments in Birmingham city centre, like http://birminghamservicedapartments.co.uk/ and others. In order to appeal to business travellers, operators need to invest in property convenient to the major commercial sectors, often meaning city centre or other premium location property, making the startup cost per unit extremely high.
In a recent poll, 33% of serviced apartment operators found business rates to be one of the greatest challenges to contend with, making the cash return potentially lower than would be hoped, although property appreciation is still a major long-term return.
Regardless of these challenges, however, serviced apartments are increasing quickly, but not quickly enough to meet the demand for them. Total serviced apartment deals were over £300 million in 2015, which was more than double the 2014 total. Regardless of challenges, the sector is growing and improving rapidly.
Summary
This article looks at the challenges facing serviced apartment operators, a sector that has grown rapidly as an alternative to hotels and long rental contracts. It covers competition from hotels on shorter stays and from platforms like AirBnB, plus high startup and running costs, with a third of operators citing business rates as a major challenge. The sector is still growing quickly despite this.
Questions this article raises
- How much of the sector’s growth is being driven by business travel recovering versus leisure demand?
- Which UK cities offer the best returns for new serviced apartment operators right now?
- How are operators responding competitively to AirBnB besides pricing?
