London Serviced Apartment market report

CNM Estates July 2015 London Serviced Apartment market report DRAFT REPORT savills.co.uk

Contents 1. INTRODUCTION 1 2. OVERVIEW OF THE LONDON SERVICED APARTMENT MARKET 3 2.1. Evolution of the serviced apartment concept globally and in London...3 2.2. Drivers of demand & typical guest users...5 2.3. Types of serviced apartment offer...6 2.4. Potential future hotspots for Serviced Apartment development in London (outside Zone 1)...7 3. KINGSTON & SUTTON OVERVIEW 11 3.1. Drivers of demand in the Kingston & Sutton markets...11 3.2. Overview of existing supply & pipeline...12 4. OUTLOOK FOR THE KINGSTON AND SUTTON SERVICED APARTMENT MARKETS 14 CNM Estates July 2015 1

EXECUTIVE SUMMARY Serviced apartments are establishing themselves in the UK hospitality market, however it continues to lag more mature international markets, particularly in terms of public awareness. London is the primary market in terms of supply and future development. Stock expansion in London has been gaining momentum as consumer demand for this type of product widens and developers/operators look to develop purpose built stock in order to capitalise on this demand. Increasing consumer demand for serviced apartments has been driven by improving economic conditions and the trend towards greater variety in the wider hospitality market, which has seen the development of new brands and concepts that are aimed at the specific needs of different types of travellers and/or trips. Serviced apartments in the UK are largely aimed at meeting the needs of business travellers on extended trips, similar to that seen in the more developed US and Asia Pacific markets. As a result supply has tended to cluster in areas close to office/business districts. Land values and competition for sites has meant that developers/operators are looking to new areas within Greater London in order to satisfy demand. Crossrail and the re-emergence of sub-regional office markets are opening up new opportunities for serviced apartment development, particularly those with good links to Central London. Positive office based employment growth for both Kingston and Sutton boroughs points to potentially increasing demand for serviced apartment accommodation in both locations, due to the close historical relationship between the corporate market and serviced apartment demand. There is no purpose built stock in either Kingston or Sutton, although there is grey supply in both. Grey supply is individual units or a small selection of units (under 5) that are located in larger traditional residential blocks and which are being operated as serviced apartments. These properties are not purpose built and do not feature in official hospitality stock data. Based on this grey supply there are an estimated 11 and six serviced apartment units in Kingston and Sutton Local Authority districts respectively. Compared to neighbouring areas, such as Richmond and Croydon, and in light of supply levels relative to office based employment, both Kingston and Sutton would appear to be relatively undersupplied. This suggests there would be scope to increase supply levels in both markets. Pricing pressures in Central London areas may also mean greater corporate demand for serviced apartment units in London s sub-regional centres, particularly those with good transport links to Central London, where average rates are lower. This trend will potentially support demand for additional stock. However, while there would appear to be scope for stock expansion, the scale of this will be potentially mitigated by the strength of the corporate market going forward in each location and transport connectivity relative to competing neighbouring centres such as Croydon and Richmond. CNM Estates July 2015 1

1. INTRODUCTION We understand that CNM Estates require a report on the evolution and development of the Serviced Apartment market in Greater London with a particular focus on existing and future supply within the Kingston and Sutton Local Authority districts. Detailed below is the report outline; Overview of the London Serviced Apartment market Review of the development of the market in London over the last 10yrs Evolution of the sector and types of operations Typical guest segment Potential future hotspots for development Kingston & Sutton market overview Overview of Kingston & Sutton corporate market and what this means for serviced apartment demand Analysis of existing stock & pipeline Outlook for Kingston & Sutton markets CNM Estates July 2015 2

2. OVERVIEW OF THE LONDON SERVICED APARTMENT MARKET 2.1. Evolution of the serviced apartment concept globally and in London Serviced apartments are establishing themselves in the hospitality sector in the UK yet compared to other international markets are still lagging behind, although largely in terms of public awareness. London continues to be a core market in the UK with several international operators seeing the Capital as a gateway to the wider UK and European markets. The serviced apartment concept, or rather extended stay, originated in the US in order to provide an alternative to hotels for those on longer stays, typically business travellers, who wanted home type facilities i.e. kitchens, laundry. The size, geographically, of the US meant that those on business trips tended to travel much further and as a result stayed in those locations for much longer as the ability to travel home on a regular basis was more expensive. This meant that extended stay accommodation proved more attractive for this type of traveller. These same factors also helped to expand the serviced apartment market in Asia Pacific. As a result the serviced apartment markets in the US and Asia Pacific are far more developed than those in Europe as demonstrated in figure 1 below. The chart compares the number of apartments per 1,000 business visitors (domestic and international) per annum for key global cities. New York would appear to have the most developed market with 5.7 apartments per 1,000 business visitors. In contrast London has the tightest supplied markets with 1.7 apartments despite receiving more business visitors than Hong Kong, Sydney and Singapore. This relative undersupply is down to the fact that the sector is still immature in the UK, lacking the public awareness seen in other, more mature, international markets. It also indicates that there is room for further supply expansion. Figure 1 International supply comparison Source: Savills; STR; CHPA; Australian Bureau of Statistics; Singapore Tourist Board CNM Estates July 2015 3

While the sector is still relatively immature in the UK with supply accounting for approximately 12% of hotel stock in London, expansion has been gaining momentum as consumer demand for this type of product widens and developers/operators look to develop purpose built stock in order to capitalise on this demand. Investment into the sector, both from private equity and institutional investment sources, has also aided expansion. For example, figure 2 below details the number of new openings of stand alone, purpose built/redeveloped serviced apartment operations across Greater London. Between 2003 and 2011 new openings were relatively limited averaging five new openings per year. However, from 2012 new openings have increased with 2014 reporting a new peak in activity of 24 new openings. To date for 2015 there have been 12 new openings and based on known pipeline could reach 24 again by the end of the year. Figure 2 New openings in Greater London (count) 26 24 22 20 Count of new openings 18 16 14 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD15 Source: Savills; AMPM Despite, very few openings of purpose built properties/blocks it is not to say that the sector was not expanding physically. Historically the sector has largely expanded in London by operators taking on existing residential units (typically with a C3 consent). This stock was largely constituted of single or several residential units spread across multiple locations. This grey supply, while it serviced demand was not necessarily ideal for operators or consumers. For operators it meant supply could be relatively disparate in terms of quality it also meant the ability to generate economies of scale were reduced impacting on profitability. From a consumer perspective, there was perhaps not the level of service normally associated with a hospitality offer such as reception desk for example. CNM Estates July 2015 4

2.2. Drivers of demand & typical guest users Increasing consumer demand for serviced apartments has been driven by improving economic conditions and the recent move towards greater variety in the wider hospitality sector, which has seen new brands and concepts develop that meet the demands from specific types of travellers and/or types of trips. For example, a number of new hotel brands have launched in the UK aimed at millennial travellers such as Citizen M and the boutique hostel brand Generator. Likewise serviced apartments in the UK are largely aimed at meeting the needs of business travellers on extended trips as seen in the more developed US and Asia Pacific markets. Their popularity with the corporate travel segment was cemented with the 2007/8 financial crisis. With corporates looking at ways to control costs, serviced apartments offered a more cost effective alternative to hotels for business trips and contract employees. For example, two-bed apartments meant employers could accommodate two employees in a single apartment at a lower cost than having two separate hotel rooms. The fact that guests could cook in-house, plus the absence of room-service also helped to keep costs down. As a result the sector reported some of its strongest occupancy levels between 2008/9 outperforming the hotel sector. While these cost pressures have dissipated to a certain extent, serviced apartments have remained attractive to corporates as they are considered more comfortable and preferable to hotels for those on longer stays. While demand largely comes from the corporate market they also appeal to the weekend leisure segment, particularly groups and families. Improving economic conditions have resulted in a recovery in business travel numbers as corporates have relaxed/reinstated travel budgets. Overseas business visitor numbers to London have increased 5.1% per annum on average since 2009, however, total numbers are still 10.5% off their previous peak in 2006. In contrast, overseas leisure visitor numbers are already 36.2% above their previous peak. This suggests the business travel segment is still in the early stages of recovery indicating that there is still a potentially significant upside to corporate demand and in turn serviced apartment demand. The appeal of the sector to business travellers has meant that serviced apartment supply has tended to cluster in areas close to office/business districts. This has been driven by corporate's preference to accommodate staff in serviced apartments in areas close to their place of work. In Central London this has seen stock expansion concentrate in those areas in or close to the City, such as Aldgate and the Southbank. Beyond Central London, those areas close to sub-regional office districts with good transport links are also proving attractive to operators as employers in these areas will generate demand. CNM Estates July 2015 5

2.3. Types of serviced apartment offer While the expansion of the serviced apartment market is part of a wider evolution of the hospitality sector, it is also going through its own progression with the development of various subsectors. The three major subsectors of the market are Corporate Housing, traditional Serviced Apartments and Aparthotels, a description of each is detailed in the table below. These features are those typically associated with the subsector, they are not fixed and will be dependent on the operator/brand and location. Table 1 Serviced Apartment subsectors Subsector Description (typical facilities and services) Aimed at those on longer stays typically over 30 days. Identical to a standard residential unit Corporate Housing with full kitchen. No reception desk but concierge service via phone available. Weekly cleaning. Aimed at those on shorter or longer stays. Tend to be identical to a standard residential unit. Serviced Apartments May have a part-time or 24hr reception. Weekly or daily cleaning. Aimed at those on shorter stays. Unit sizes are smaller, typically studios and/or small onebed apartments. Kitchens are fully functional but smaller with laundry services typically Aparthotels offered in a central area. 24hr reception. Daily cleaning. Source: Savills The primary difference between the various subsectors is based on the size of unit and level of service, with each typically aimed at those on different lengths of stay. As seen in the hotel market and the development of new brands to meet differing consumer types and/or types of trips, the serviced apartment market is evolving to meet the differing needs of guests on different types of extended trips. The development of the aparthotel concept is bringing the sector more closely aligned with hotels, although due to the nature of the product it is complimentary to standard hotel provision rather than cannibalising hotel demand on any significant scale. This closer alignment is also providing benefits to consumers. For example, the grey supply that historically dominated serviced apartment stock meant that quality levels varied greatly even within a single operator s portfolio. This was exacerbated by the fact that there was no official grading system for the sector as with hotels, although this is now being resolved with the introduction of the Association of Serviced Apartment Providers (ASAP) accreditation scheme. Stock expansion of purpose built stock by developers/operators is also helping to resolve this issue as it is providing operators the opportunity to create a quality and standardised product that is in line with their brand. For consumers this provides them with comfort regarding the quality and nature of the offer at the time of booking, something that was lacking historically and which was identified as a significant factor limiting expansion. In turn the development of purpose built stock is helping to promote consumer awareness around the sector as purpose built stock can help to promote operators and their brands. CNM Estates July 2015 6

2.4. Potential future hotspots for Serviced Apartment development in London (outside Zone 1) The expansion of purpose built stock to date in London has largely concentrated in those areas close to the City, with 21.9% of Central London supply found in the City & Midtown submarket. However, land values and competition for sites has meant that developers/operators are looking to new areas in order to satisfy demand. Crossrail and the re-emergence of new office submarkets within Greater London are opening up opportunities. Crossrail in particular will mean that areas of London will be far closer to the City and West End in terms of travel time making them potentially attractive to operators. The lower values associated with these areas also means that average daily rates (ADRs) for these locations can be lower than what is financially viable in more central locations, proving attractive to corporates wanting to accommodate contract workers and lower staff grades. Couple this with large mixed use redevelopment projects, which will help to enhance the attractiveness of a location, means that a number of areas beyond Zone 1 could be potentially attractive for serviced apartment development. Detailed below are some areas that could prove attractive and suitable for future serviced apartment development, with a their respective strengths and threats. Please note this list is confined to those areas outside of Zone 1 and is in no particular order related to preference. 2.4.1. Stratford Strengths Crossrail station opening 2018/19 with projected travel time to the City (Liverpool Street) of 7mins and West End (Bond Street) of 15mins. Existing travel connections (mainline and central line) means the area already has strong transport links Presence Westfield has and continues to rejuvenate the area making it more attractive as a place to stay Development of International Quarter new business quarter planned to accommodate 25,000 people with the FSA and Transport for London already agreed to take space. Businesses in the local area will have potentially positive impacts on demand. Threats/issues There are three existing serviced apartment properties already in Stratford with a total of 284 units. The largest is IHG s Staybridge Suites which has 162 units. This is expected to increase to four properties as planning consent has been granted to Accor s Adagio Aparthotel brand which will deliver an additional 137 new units to the market by 2017/18. 2.4.2. Croydon Strengths Has an already well established office district with a number of large corporates having a presence in the town as well as a number of public sector organisations. Large private sector employers include Mott MacDonald (c.1000 employees), Liverpool Victoria (c.800 employees) and Mondial Assistance (c.800 employees). Office occupational demand has been improving as businesses look to establish a presence in the town due to its relatively lower rents compared to Central London and its good transport links into London. Ruskin Square, a nine acre mixed use scheme next to East Croydon station is expected to deliver approximately 1.3m sq ft of new office space (maximum projections). If delivered successfully it will attract new and expanding businesses into the town. This will have potentially positive implications for serviced apartment demand. CNM Estates July 2015 7

Westfield s development of Croydon town centre will rejuvenate the area and enhance its reputation, which will have additional implications in terms of office occupational demand. Existing serviced apartment supply is restricted to one location with only 55 units suggesting the market is currently underserved. Pipeline is also heavily constrained with only one purpose built scheme of 22 units in the pipeline that is currently on hold. Threats/issues There has been a significant delivery of new build residential units into the Croydon market, with further schemes in the development pipeline. As we have seen in other similar markets a proportion of this new residential stock may come under the operation of serviced apartment operators. As a result supply levels may not be as constrained as that indicated by official data. 2.4.3. Old Oak Common/ Park Royal, North West London (Willesden) Strengths Old Oak Common will be one of the largest regeneration schemes in London for decades and will deliver a new mixed use neighbourhood of 24,000 homes with more than 55,000 jobs. There will be an interchange station on site for Crossrail and HS2 by 2026. This will make the area attractive for office development, which will have knock on benefits for hotel and serviced apartment demand. The Crossrail station will also reduce travel times into Central London further enhancing its attractiveness to operators. Threats/issues The existing local area is not an established office or hospitality market, the development will be creating a new market. It is a long term project that will be underpinned by the opening of the Crossrail/HS2 station in 2026. CNM Estates July 2015 8

2.4.4. Crossrail I and II Crossrail I and II will potentially widen the number of areas that could be suitable for serviced apartment development as it will reduce the travel time into Central London. Current operator preferences are for locations within a 10min walk to a station, with that station being within a 15min travel time of Central London. Crossrail will increase the number of areas outside zone 1 that would be suitable based on this requirement. There will be those areas on the Crossrail route that will be more suitable based on its office market/presence of corporate, general quality of its environment and large scale regeneration projects. Some of the key ones have been identified above, but based on the Crossrail routes we would also suggest the following areas may be suitable. However, we would recommend discussing these with a serviced apartment operator as they would be best placed to advise on guest demand in these areas. Potential future hotspot markets; Ealing West Drayton Slough Custom House/ Royal Docks Wimbledon CNM Estates July 2015 9

Figure 3 Crossrail I route Figure 4 Crossrail II southern route CNM Estates July 2015 10

3. KINGSTON & SUTTON OVERVIEW 3.1. Drivers of demand in the Kingston & Sutton markets As highlighted previously, the presence/clustering of corporate and growth in those businesses are key drivers of demand for serviced apartments. As with hotels and other services, such as retail and leisure, their presence can be considered as supporting the overall quality and attractiveness of a market as a business location. The Economic Analysis study produced for the Royal Borough of Kingston upon Thames noted that while Kingston is not considered a major employment hub, loosing out to relatively better connected and nearby centres such as Wimbledon and Richmond, it does enjoy healthy levels of occupational demand from local firms wanting to expand/upgrade. This is reflected in the growth in office based employment sectors over the last two years. Office based employment is estimated to total just over 19,000 in the borough having expanded 4.4% since 2012. This growth in office based employment in the borough is forecast to continue with Oxford Economics indicating average growth per annum of 3.1% through to end of 2019, exceeding the Greater London average. This suggests there may be increasing demand for serviced apartment accommodation in the borough. Sutton is very similar to Kingston in that its office market is quite localised and dominated by local firms. Likewise, while it is considered as being a reasonable good business location it is often considered secondary to other larger, nearby markets such as Croydon and Wimbledon. However, the borough s most recent Employment Land review did note that there have been examples where Sutton has attracted office occupiers from these areas. This is reflected in the increase in office based employment in the borough over the last two years, which has expanded by 3.2% bringing total office employment to an estimated 22,900. These numbers are forecast to increase over the next five years with average growth per annum of 2.6% in line with the Greater London average of 2.7%. This expansion, indicating improving health in the borough s corporate market, should prove beneficial in terms of serviced apartment demand. Table 2 Office based employment Market Office based employment Increase over last 2yrs (2012-14) Forecast average per annum (2015-19) Kingston upon Thames 19,300 4.4% 3.1% pa Sutton 22,900 3.2% 2.6% pa Greater London 1.9 million 11.2% 2.7% pa Source: Oxford Economics CNM Estates July 2015 11

3.2. Overview of existing supply & pipeline There is no official serviced apartment supply in either Kingston or Sutton boroughs, in that there is no existing purpose built stock. This is sharp contrast to neighbouring boroughs such as Richmond, which has 37 official units across four locations. Sutton s neighbour Croydon has 55 units concentrated in a single property. However, there is grey supply in both markets. We classify grey supply as being individual units or a small selection of units (under 5), which are located in larger traditional residential blocks, being operated as serviced apartments. These properties are not purpose built and do not feature in official hospitality stock data. It is very difficult to quantify this type of supply as inventories are not fixed as operators tend to take these types of units on short term leases and/or management contracts. We have, however, estimated the size of this grey market in both boroughs based on the number of operators in each and the average unit holdings typically associated with these types of operators in other more transparent markets. The estimated grey stock figures are detailed below along with the known development pipeline. In terms of the development pipeline, again this is relatively constrained with no purpose built schemes currently in the pipeline within Sutton s borough and three schemes, all led by CNM Estates, in the pipeline for Kingston totalling 105 units. We would note, however, that this future pipeline does not take into account those residential units that may come into serviced apartment use as part of the grey market. Table 3 Serviced apartment supply and development pipeline Local Authority district Purpose built supply (units) Grey supply (units) Development pipeline (units) Kingston upon Thames 0 11 105 Sutton 0 6 0 Source: Savills Research As there is no purpose built stock in either the Kingston or Sutton local authority districts, it would suggest that both markets may be undersupplied. As this cannot be ascertained from operational performance data (occupancy levels provide an indication of demand and in turn undersupply), due to the fact current supply is solely made up of grey stock, we have examined this grey supply in the context of its office employment. This is based on the premise that the presence of corporates in a given market provide a good indication of demand. We have then benchmarked this supply ratio against other nearby/similar local authority districts. This analysis approach is similar to that used when examining London supply against other international locations as detailed in section 2.1. We would note that this analysis will not definitively identify whether a market is over or under supplied, rather it will highlight those markets which may be relatively over/under supplied compared to its peers and/or more developed markets. The results of this analysis is detailed in the table below. Table 4 Serviced apartment supply relative to office based employment (local authority level) Local Authority district Ser Apt units per 1,000 office based employees Kingston upon Thames 0.6 Sutton 0.3 Richmond 2.2 Croydon 2.8 Source: Savills Research; Oxford Economics Note: Stock levels are based on both official and grey supply in the borough CNM Estates July 2015 12

Based on this analysis it would appear that both Kingston and Sutton are under supplied relative to their neighbours (Richmond and Croydon). The better supply levels in Richmond and Croydon no doubt reflects their better transport links with Central London and their larger corporate market, which have made them attractive locations for operator expansion. While Kingston and Sutton may not be suitable to have identical quantum of serviced apartment stock there would still appear to be scope to increase supply to bring it more in line with their neighbours due to the huge differential. Pricing pressures in Central London areas may also mean greater corporate demand for serviced apartment units in London s sub-regional centres, particularly those with good transport links to Central London, where average rates are lower. This trend will potentially support demand for additional stock in both Kingston and Sutton relative to expansion in neighbouring markets. CNM Estates July 2015 13

4. OUTLOOK FOR THE KINGSTON AND SUTTON SERVICED APARTMENT MARKETS In light of employment growth forecasts, the positive economic outlook nationally and the absence of any purpose built serviced apartment stock in either Kingston and Sutton, it would appear that there is an opportunity to increase stock levels in both markets. This is further supported by current supply levels relative to office based employment when benchmarked against other nearby local authority districts (see table 4). With concept and brand awareness of the sector improving demand for this type of product is expected to rise as visitors become increasingly aware of the advantages of serviced apartments for extended trips, particularly those on contract and secondments. This growing awareness will provide additional support for serviced apartment stock expansion in sub-regional centres such as Kingston and Sutton. However, while there would appear to be scope for stock expansion the scale of this will be potentially mitigated by the strength of the corporate market going forward in each location and transport connectivity relative to competing neighbouring centres such as Croydon and Richmond. Having said this, pricing pressures in these more established markets may generate overspill demand as corporates look to more costeffective locations in order to accommodate staff. CNM Estates July 2015 14

IMPORTANT NOTE This Report is for the stated purposes and for the sole and exclusive use of CNM Estates and any subsidiary company thereof to whom it is addressed and for their professional advisors, plus any person or institution whose identity has been previously communicated in writing to Savills UK Ltd as having an interest in the Research. This Report - in whole or part - shall not be used, referred to or included in any published document, circular, statement or press release without the prior written approval of Savills UK Ltd as to the form, content and the context in which such publication shall take place. As is customary with such reports, our findings should be regarded as valid for a limited period of time and should be subject to examination at regular intervals. Whilst every effort has been made to ensure that the data contained in it is correct, no responsibility can be taken for omissions or erroneous data provided by a third party or due to information being unavailable or inaccessible during the research period. The estimates and conclusions contained in this report have been conscientiously prepared in the light of our experience in the property market and information that we were able to collect, but their accuracy is in no way guaranteed. CNM Estates July 2015 15