Investment in UK serviced apartments could triple by 2018

The lack of purpose-built stock in London could be creating an investment volume deficit in the UK serviced apartment market, according to a new report published by Savills.

Investment in serviced apartments in the US has totalled £1.3 bn (€1.6 bn) so far this year, equivalent to 12% of total US hotel sales. This compares with investment of only £123.5 mln in the UK, or 5% of total UK hotel sales.

The dearth of stand-alone blocks with the appropriate consent in the UK means that investment activity remains highly constrained. Savills predicts significant development expansion over the next five years could mean that serviced apartment investment volumes increase in line with that seen in the US.

'The US is a bigger market so like-for-like comparisons are difficult, but the dramatic difference in volumes does demonstrate the significant potential for growth in the UK market,' said Tim Stoyle, head of hotel valuations at Savills. 'New investors to the sector have recognised its investment potential and are committed to expanding purpose-built stock.'

It’s not just London that has capacity for expansion. Supply in the key regional cities per 1,000 business visitors is even more constrained with Birmingham having the lowest relative supply of 0.6 units. However, further growth would need to be approached cautiously due to the shorter lengths of stays typical of business visitors outside the capital.

'The increasing movement towards C1 (hotel) consent when it comes to expanding stock will help to legitimise the sector and boost future investment,' said Marie Hickey, associate director of research at Savills. 'Previous expansion was largely driven by the acquisition of standard residential (C3) units, typically part of larger residential blocks, through leases and or management contracts. In London this has posed a risk to operation as C3 properties cannot be let for periods of less than 90 days.'

The aspiration of serviced apartment operators to develop their own branded offerings looks set to be realised with the entrance of new investors. For example the tie-up between Go Native and Palmer Capital-backed Danescraft will see Danescraft redevelop sites and Go Native taking the units through either a lease or management agreement. For others it will mean the creation of new owner-operated brands as with Oaktree Capital’s £300 mln allocation to the newly established CLSA to develop a portfolio of serviced apartment operations across the UK.