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Serviced Apartments Booked In For Growth

The long-term trend towards affordable, well-located, serviced apartments has been accelerated by Covid as many people feel they are safer and more flexible than hotels, Sally Lindsay writes.

By: Sally Lindsay

1 January 2023

The serviced apartment market in New Zealand is primed for growth with an uptick in occupancy levels in this segment of the commercial accommodation sector, says Wayne

Keene, Bayleys hotels, tourism and leisure director. “People are booking well-priced options that allow for a home-away-from-home experience.” Most serviced apartments include a bedroom or multiple bedrooms, depending on its size, fully equipped kitchen, living area, bathroom or en suite facilities and parking. Some come with access to workspace, a gym and a swimming pool.

“There’s a real benefit in having technology-enabled accommodation complete with dedicated kitchen and laundry facilities as travellers and guests are shying away from communal amenities and facilities given health and safety concerns post-pandemic,” says Keene.

“Serviced apartments also appeal to the extended-stay corporate market, which is active again as face-to-face dealings become more widespread and the business sector recalibrates.”

The serviced apartment market here is tiny compared with Australia where purpose-built towers make up the bulk of accommodation in holiday hot spots, such as the Gold Coast. Across Australia the market size, measured by revenue, is A$1 billion, and was expected to grow 12.1 per cent by the end of last year, although it has declined 7.8 per cent per year on average over the past five years.

Instead of opting for traditional real estate or flipping and trading properties, investors enter serviced apartments for a reasonable price and a decent yield.

Keene says income obtained from serviced apartments is generally higher compared with other long-term rental properties. For example, two apartments side-by-side in an apartment building can yield different results. “A long-term rental could fetch $600 a week, while a serviced apartment in the building’s hotel pool, for example, could be let for $350 a night for five nights, generating $1750 a week in income. It is as equally profitable for the owner, who would get half of the income, as well as the hotel operator.”

Another great advantage of investing in serviced apartments, says Keene, is that the owner doesn’t have to take care of aspects such as maintenance or repairs. These are managed by the operator who takes care of the entire property.

“In the past it was regarded as a risky investment, however with the lack of short-term accommodation it now stacks up as a good venture.”

MANAGEMENT POOLS

Mt Maunganui and Queenstown have the biggest share of the serviced apartment market. In Australia the serviced apartment sector is made up of mainly purpose-built high-rises with a 50/50 split between long-term tenanted and serviced apartments. “The New Zealand market is not as well educated about serviced apartments and few developers have specifically built residential high rises with half of the apartments set aside for a management operator. Apartments put into a management pool are often an afterthought and consequently the reception area is usually a small space in the corner of the building’s entrance foyer,” says Keene.

NZ’s serviced apartments market seems to be largely based on two-bedrooms 60m2 apartments and others up to 80m2 units, which Keene says are not very livable. However, Quest operates serviced apartments on a 70m2-90m2 model right across the country.

Across the ditch, Australia’s serviced apartments start at about 100m2. Ideally, says Keene, serviced apartments from 100m2 to 150m2 will start to be developed here, particularly near main city CBDs. “Larger apartments with two to three bedrooms for groups of two to four and with every modern convenience at an affordable price are what travelers are looking for.”

Some of NZ’s bigger serviced apartments are on the penthouse floors of Mt Maunganui’s sea-front high rises, Queenstown, Herne Bay and Ponsonby. “Investors will buy bigger apartments for the serviced market as they attract more visitors and families and a bigger per night rate.”

Many international serviced apartment sector players and hotel brands, who are not in NZ, are on the acquisition trail and Keene says Bayleys talks regularly to operators seeking management rights for conveniently located short-term accommodation properties to strengthen their portfolios.

He says it’s a volume game for operators, who need to make the managed serviced apartment model work efficiently and cost-effectively.

Serviced apartment income is generally higher than other long-term rental options.

ABOVE AND LEFT Avani Metropolis Residences – owned and operated by investor Minor Hotels.

RIGHT Nesuto Stadium Hotel and Apartments has added dining and conference facilities to meet demand.

ECONOMIES OF SCALE

“In the main metropolitan centres, and given economies of scale, around 100 serviced and 100 long-term apartments in the same building is the sweet spot to make it a viable proposition for an operator to consider. There are always exceptions and in smaller centres around New Zealand, more modest apartment developments of fewer than 30 units could be considered by some brands.”

While a small market here, it’s a sector that has potential to grow on the back of changing accommodation preferences by independent travellers.

“There is also scope for new developments to take off in centres that have evolving central business districts, limited serviced apartment stock, and appeal for short-term visitor stays – such as Hawke’s Bay,” says Keene.

There’s evidence of changing property use to meet the demand for serviced apartment stock, with the conversion of a former strata-titled luxury residential apartment complex into the 4.5-star Nesuto Stadium Hotel and Apartments in Auckland’s CBD as one example.

“Now, this largely serviced apartment facility with some hotel rooms has added dining and conferencing amenities, is filling a gap in the market, but there are also other ways to ring-fence existing apartments for the commercial accommodation pool.

“In some instances serviced apartment operators can acquire the management rights for a bulk number of apartments within established buildings, enabling them to offer these to the short-term occupation market alongside privatelyowned and occupied residences,” he says.

To demonstrate, Keene points to the Avani Auckland Metropolis Residences, professionally managed by international hotel owner, operator and investor Minor Hotels, which runs an apartment business in the flagship Metropolis tower in central Auckland via a licence agreement with the body corporate

“Under a section of the Unit Titles Act, the Avani brand occupies parts of the common property of the ground floor lobby and basement of the building for, among other things, the provision of reception and concierge services to support the 111 apartments it controls.”

Keene says investors are attracted to serviced apartment assets because of the cost-effective operational models and higher margins. “Serviced apartment offerings by nature require fewer staff and this proved invaluable at the height of the pandemic when the labour market was squeezed. “Further efficiencies are likely to roll out, too, and as the international travel market resumes post-Covid, we expect to see more efficient and streamlined guest processing operations with technology enabling touchscreen check-in/check-out kiosks, code-activated entry points and online concierge services.”

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