Interview: hotel trend extended stay
Apartment hotels have a market share of around 3 per cent in Germany. Property market professionals predict that this will rise to around 10 per cent by 2030. Institutional hotel investors have already discovered the appeal of extended stay concepts. In this interview, Martin Schaller and Andreas Löcher of Union Investment explain the background.
In the hospitality industry, the term “extended stay” refers to a booking period of between 5 and 30 days. The shift towards more mobile and increasingly project-based forms of work, combined with the preference of many short-term travellers for accommodation that feels like home, is currently boosting growth significantly in this hotel category. According to a market report by Savills, the largest operators in the extended stay market are set to increase their stock levels in Europe by nearly 40 per cent before the end of 2022.
Mr Schaller, what do you see as the key features of an extended stay hotel concept? What differences are there compared to traditional short stay hotels?
“Extended stay concepts clearly have a number of features in common with traditional hotels. At the same time, the public areas are usually smaller, partly because guests prefer to be more self-sufficient and independent. Rooms are usually equipped with a kitchenette and there is often a small convenience store for daily essentials on the premises instead of a restaurant. It’s important for extended stay guest rooms to feel comfortable and homelike. As well as the kitchen, things like sofas and other furnishings give the impression of a welcoming living room.”
How do apartment hotels differ in the way they operate? What benefits do you expect from extended stay concepts in terms of portfolio management?
“The basic assumption is that apartment hotels can be managed more cost-effectively than traditional hotels because they offer fewer services. In a traditional hotel, the average length of stay is 1.8 nights, whereas in an apartment hotel it’s between 3 and 5 nights. Longer stays result in cost savings, particularly when it comes to marketing, check-in and check-out procedures and room cleaning. The operator is thus able to achieve a higher net income from a lower turnover of guests. However, we would normally also expect the operating costs to be higher. For example, the kitchenettes in the guest rooms need to be kept in good working order and the apartments require more floor space for the various amenities.”
“From an investor perspective, it’s worth noting that the trend towards more apartment hotels means we are considering locations that wouldn’t really have been on our radar in the past. After all, a hotel product is always defined by its location. We recently acquired a hotel that is being developed under the Hyatt House brand in Eschborn, near Frankfurt. If the building had been a conventional short stay hotel in this highly commercial environment, we wouldn’t have considered it. But for Eschborn, an extended stay concept makes sense not least because rooms in this location are likely to be booked beyond the end of the week, meaning occupancy rates can be increased overall. In turn, we have more opportunities when it comes to acquisitions.”
Who do you see as being the main drivers in the growing market for apartment hotels?
“Compared to the first big boom in the budget hotel sector a few years ago, this time there are fewer new market players driving the trend for apartment hotels. Instead, we’re seeing the major hotel chains launch fresh, new brands in order to capture growth. Examples include the Adagio and Adagio Access brands from the AccorHotels Group, Hyatt House by Hyatt, Embassy Suites by Hilton, Staybridge Suites by IHG, the Residence Inn brand by Marriott – the list could be continued. For us as an investor, the advantage here is that we are dealing with financially strong partners who have many years of experience in the hotel industry. In addition, these new brands are hooked up to the marketing and booking systems of the big-name players. That helps to provide investment security.”
“In this context, it’s also interesting to take a look at the recent history of apartment hotels. Extended stay concepts became popular in Australia about 30 years ago. Business destinations there are usually located a long way apart so business travellers would arrange as many meetings as possible during their stay in a particular city. Brands such as Adina, for example, were launched at that time and offered very spacious accommodation of 1–2 bedrooms. Nowadays, the trend – at least in Europe – is towards a denser use of space with smaller rooms in a studio layout. New interior design concepts are helping to drive this trend, which enables the operators and owners of these properties to use space in a more economical and efficient way.”
What are the returns like for apartment hotels? Can you see Union Investment launching a separate special fund for extended stay concepts?
“Apartment hotels offer exciting scope for further diversifying our hotel portfolio in order to make sure our holdings reflect the wide range of overnight accommodation options in the market. Having said that, other investors are also aware of the attractions. Acquisition yields on these hotels are thus very similar to those for traditional hotels. A separate special fund like the one we launched for budget hotels is currently not an option for Union Investment because the market segment is still too small overall. Nevertheless, sustainable new hotel concepts give our fund managers greater confidence in hotel properties, which opens up new opportunities for us when making acquisitions.”