Column: The rise and rise of the extended-stay hotels sector

By Eduard Elias - Thursday, November 09, 2017 14:57

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Travellers to Asia and the Americas have, for some time now, enjoyed the benefits of extended-stay accommodation such as serviced apartments and aparthotels. However, with comparatively few properties of this type at present, the UK and European markets have been lagging behind, with most travellers in these locations choosing between traditional hotel rooms or private holiday rental properties, writes Eduard Elias, co-founder of Cycas Hospitality.

With its ability to offer flexibility and independence combined with the reliability and customer service standards associated with a branded hospitality offer, extended-stay accommodation is now evolving as a major sub-sector in the hotel industry globally. It has been the fastest growing segment of the US lodging industry for more than a decade. Worldwide - and especially in under-developed markets such as London, where the sector only occupies about 2% of total room supply - there is significant room for growth.

As worldwide economies grow ever more interdependent, temporary assignments, projects, specialised training and installations continue to become more significant. Extended-stay hotels are designed to meet the needs of these travellers and so we can expect to see the segment grow even more rapidly than it has done in the past. In the UK alone, Savills estimates that 2,600 units will have been delivered over 2017, a 13.8% increase on 2016 stock levels.

A further source of this growth will be the millennial generation, whose changing attitudes towards travel are transforming the hospitality sector. Younger travellers are shunning hotel restaurants and instead looking for opportunities to live like a local, necessitating a longer-than-average stay and alternative hotel experience, which is met by the extended-stay sector. With millennials forecast to account for 50% of business travellers by 2020, this generation is likely to underpin future demand in the extended-stay sector.

While Airbnb was initially viewed with trepidation within the sector, it has, in fact, triggered a mainstream awareness of alternative forms of accommodation to traditional hotel rooms. Extended-stay hotels, which tend to be in more central locations than many Airbnb rentals, appeal to those who might also want to enjoy the services and amenities that come with staying in a hotel and value a more reliable experience and a more consistent product than Airbnb.

While in the past many investors had reservations about the sector, its rapid global growth has led to increased awareness and means that investors are waking up to its benefits, including attractive yields compared to three-star and budget hotels due to relatively low operational costs. With high profit margins, stable cash flow, high space efficiency, conversion flexibility and lower development cost, extended-stay hotels are expected to follow the path of student housing and become an established asset class in the property sector.

The numbers back up this assertion too. Transaction volumes in the UK grew 146% from 2011 to 2016, up to £136 million, and the sector now accounts for 6% of hotel investment volumes, compared to just 2% in 2011. Although a rapid increase, these numbers suggest that the extended-stay sector is still a niche industry, which is largely due to the undersupply of institutional-grade stock across Europe. However as new purpose-built stock is delivered, these transaction volumes are anticipated to take off, and we expect the market to grow at a similar rate to the US.

Driven by millennials, increased investor support, and with new stock coming to market, the extended-stay accommodation sector is here to stay.

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