Hotel serviced apartments, which are "changing faces"

Text | Space Detective, Author | Wu Shuang.

Recently, Shanghai's long-term rental apartment market can be described as very "lively", Frasers Hospitality Group's Fraser Place brand has entered Shanghai, and Tishman Speyer has also announced its entry into Shanghai's high-end long-term rental apartment market, but Ascott Hengshan Shanghai has been unexpectedly sold for 1 billion yuan. From the perspective of the "dual scenario" of serviced apartments in Shanghai, are serviced apartments still a good business?

The "Dual Scenario" of Serviced Apartments in Shanghai

In recent years, the long-term rental apartment market has attracted a number of entrants, and the long-term rental bulk transaction market has gradually become active, with many groups deeply participating in Shanghai as an important market force and trying to break out of the new track. However, the recent long-term rental apartment market in Shanghai can be described as a "dual scenario".

On the one hand, there are some foreign-funded institutions aiming at the domestic long-term rental apartment track and constantly enriching apartment resources. Frasers Hospitality has officially announced the launch of Fraser Place Residences Shanghai Wujiaochang, which is expected to open in mid-2024.

Fraser Place Shanghai Wujiaochang is located in the core area of Xinjiangwan City in Yangpu District, close to the sub-center of Wujiaochang City, with Shanghai's premier natural ecological green space and four major ecological parks, bringing together many Internet giants, high-tech innovation enterprises, multinational enterprise headquarters and world-renowned universities, forming an area where innovative elements and high-end talents gather. The introduction of the Fraser Place International Residences brand may also be aimed at meeting the growing demand for high-end accommodation in the region, while creating a more multi-faceted living space for the local area.

On April 25, Tishman Speyer announced that the company acquired Pengxin Group's 20-storey hotel project in the core area of Wujiaochang, Shanghai, and plans to transform the original hotel into a new long-term rental apartment with about 300 units. Tishman Speyer said the move marks the company's official entry into Shanghai's high-end long-term rental apartment market.

The total area of the property is 34,279 square meters. The apartments on floors 2 to 20 will be renovated to provide rental units in studio, one- and two-bedroom units, with upgraded bathrooms and new kitchens, and are scheduled to be completed and officially operational in the second quarter of 2025. The project will engage Singapore-based serviced apartment operator Frasers Hospitality to provide operational services.

On the one hand, the frequency of transactions in the long-term rental apartment market is gradually active. In 2023, the investment in large-scale transactions of long-term rental apartments nationwide will be 11 billion yuan, exceeding the sum of the previous two years. This month, CapitaLand announced that Ascott, a high-end apartment hotel located at 99 Hengshan Road in Shanghai, has completed a change of shareholders. Yuncheng (Hong Kong) Co., Ltd. and CapitaLand Huayue (Shanghai) Investment Co., Ltd. withdrew, and Guangzhou Hengyi Investment Co., Ltd. became a new investor. However, CapitaLand has made it clear that Ascott China will remain responsible for managing the project.

It is understood that Ascott Hengshan Service Apartment is located in the core area of Shanghai's inner ring and is a high-end apartment product of CapitaLand Group, a Singaporean company. CapitaLand has been selling the condominium for six or seven years, with a previous offer of nearly $2 billion, although the actual transaction price has not yet been announced. However, according to industry sources, the transaction price definitely exceeded 1 billion yuan.

This is based on the project's superior location, property conditions and considerable rental income, according to the former Ascott China Managing Director Chen Zhishang previously revealed that in 2020, the long-term rental rate of the 90 units of the apartment remained above 95%, and the annual occupancy rate exceeded 90%, and Ascott Hengshan Shanghai Serviced Apartment Shanghai has contributed considerable rental income to CapitaLand for a long time.

One of the reasons for CapitaLand's opt-out may be due to the adjustment of China's real estate market, which is a challenge for many real estate companies. In addition, it may also be related to Ascott's expansion strategy from heavy to light. This move is in line with CapitaLand's business strategy and will help it further optimize its portfolio and continue to pursue investment opportunities in the China market through capital circulation.

Some people enter, some people withdraw, and these investment behaviors may change the supply and demand relationship in the long-term rental apartment market. On the one hand, the addition of large institutions such as Frasers Global, Tishman Speyer and CapitaLand is likely to increase the number of properties available for lease in the market. On the other hand, the investment strategies and operating models of these institutions may also have an impact on the quality and service of long-term rental apartments, thereby affecting the living experience of tenants. In addition, these actions also show that Shanghai's long-term rental apartment market is not only increasing in quantity, but also in terms of quality and service.

Are hotel serviced apartments still "fragrant"?

After more than ten years of development, the serviced apartments in mainland China have formed their own characteristics on the original basis, and have two major functions: "self-use" and "investment". Compared with traditional hotels, it is not inferior in terms of hardware supporting facilities, and the service is more family-oriented. Because it absorbs the advantages of traditional hotels and traditional apartments, it is favored by investors and expatriate business people working in mainland China.

As the serviced apartment market grows with the number of new entrants, so does the team. Ascott, which has been in the Chinese market for 24 years, currently has a presence in 41 cities in China, owns and manages 200 properties, and has a total of more than 44,000 apartments. Marriott's Marriott Executive Apartments have also landed 10 apartments in 8 cities, including Beijing, Tianjin, Hangzhou and Xi'an. The 243 Bulgari apartments at the Bulgari Hotel Shanghai, which opened in 2019, were sold out when they were first built. In addition, internationally renowned hotels such as Mandarin Oriental and Rosewood Hotels have also seized the hotel apartment market.

In fact, as a "branch" of long-term rental apartments, the market size of serviced apartments has maintained steady growth. According to Pengrun data, from 2016 to 2019, the growth rate of the number of serviced apartment properties in China was more than 20%, and even in the epidemic years such as 2020 and 2021, the growth rate remained above 10%.

However, with the influx of a large number of rental housing and long-term and short-term rental apartment products, the market for hotel and serviced apartments is being rapidly "divided". According to the statistics of CRIC Real Estate Operations in South China, as of April 25, there are 49 "apartment" projects to be opened or newly built across the country. At least 70% of these condominium projects are rental housing.

These leasing products have a significant impact on the rental of hotel serviced apartments. In the past few years, many local "high-end" talents in the Internet and financial circles, middle and senior managers of listed companies, Internet celebrity bloggers and other freelancers who do live broadcasts at home like to rent high-end apartments. However, in 2023, more and more leases will be surrendered, and once they are empty, the re-lease cycle will become longer and longer.

The relevant person in charge of a foreign-funded high-end apartment in Shanghai said that in the second half of 2023, there will be a wave of rent surrenders in high-end apartments invested by an international fund in Shanghai, with a maximum of more than 20 units surrendered in a month, and most tenants have not left Shanghai, but moved to cheaper apartments.

As a representative of the top luxury apartment, Bulgari Apartment has long since put down its posture. It turns out that the hotel-style apartments with a monthly rent of tens of thousands of yuan are basically in a state of "second fixation", and often several intending customers are grabbing a house, and sometimes they may have to increase the price to rent. From the second half of 2022, Bulgari Apartments has begun to carry out various preferential activities, and some activities are equivalent to 8.3% off in disguise.

However, this does not mean that hotel and serviced apartments are no longer "popular", as can be seen from the current actions of real estate, hotels and long-term rental apartment groups. A number of serviced apartment brands have successively announced expansion targets, which have never been seen before. Oakwood Bixuan Serviced Apartment, a joint brand of Oakwood and Country Garden Cultural and Commercial Tourism Group, plans to open 100 stores in China's top 50 cities by GDP by 2030. Frasers Hospitality plans to expand its portfolio of aparthotels in China to 30 over the next three years, and Ascott plans to manage 60,000 serviced residences in China by 2023.

On the one hand, the current consumer base is changing, personalized life, diversified space, high-quality service, and flexible lease terms have become new demands. The original accommodation products can no longer meet the demand, and at the same time, the products with "hotel-style management and home-style services" have become the favorite of many consumers.

At the same time, compared with the United States and other countries, domestic hotel and serviced apartments started late, the mainland market has a huge foundation, the development of the accommodation industry is in an upward period, and there are still a large supply and demand gap in the market, which is also an important reason why international groups such as Frasers Hospitality and Ascott regard China as one of the most strategic core markets.

On the one hand, in the era of stock asset management, operators need to achieve balance and return on investment by improving operational efficiency, so they must choose the "combination of long-term and short-term rentals", and use long-term rentals to reduce housing and short-term rentals to make profits, which cannot avoid serviced apartments. For many developers, the self-sustaining format is becoming more and more a very good rental income product, which is gradually replacing the original sales format.

Overall, hotel serviced apartments are still an important part of the current rental market, compared with the drastic changes in previous years, the current hotel serviced apartments are more stable, and are making breakthroughs in the direction of high quality and diversification. The competition in the hotel and serviced apartment track is also becoming more and more fierce.

What competition will serviced apartments face in the second half of development?

In recent years, capital has been making continuous moves in the field of mid-to-high-end serviced apartments. Hotel players have entered the game one after another, long-term rental apartment institutions have focused on building serviced apartment product lines, and all parties are actively deploying in the field of high-end serviced apartments. Entering the second half of the serviced apartment, what aspects of competition will be ushered in?

The first is the property dispute. At present, serviced apartment brands are almost exclusively deployed in first-tier cities and some second-tier cities in China, which is closely related to the economic level and industrial structure of the city. However, with the competition for stock assets and the rise of the urban economy, the preemption of property by hotels and serviced apartments will also tend to be "white-hot", so the following two development directions may emerge:

"Sinking" is no longer the "exclusive" of the hotel industry, and the development of "sinking" of serviced apartments in China is also imperative. On the one hand, it will be deployed from first-tier cities to second- and third-tier cities, and on the other hand, it will expand its own brand matrix based on the market. In 2020, Ascott also launched its long-term rental apartment brand Yayu to diverge its product line, and after more than a decade of expansion and development, Ascott's property distribution in China accounts for 70% of its property distribution in non-first-tier cities.

Cooperation with the industrial park may become more frequent. The combination of long-term rental apartments and industrial parks can not only ensure the occupancy rate of long-term rental apartment projects, but also increase the premium space, and the two achieve each other. In recent years, suburban industrial parks have become the first choice for long-term rental apartment layouts. For example, a large number of long-term rental apartment companies such as Bijia Apartment and Longfor Guanyu under Country Garden began to adopt this kind of layout method in 2019. On April 25, Science City Group and Ascott China signed an agreement on the entrusted management of the Citadines brand in Ketong Tower, which is also another new case of cooperation between long-term rental apartments and industrial parks.

The second is the brand dispute. Observing China's housing rental market, major housing rental companies continue to launch serviced apartment brands, laying out the mid-to-high-end and high-end rental markets. Leading hotel groups have also set foot in the project, and the existing apartment brands have accelerated the opening of projects, and those without brands have accelerated brand launches, or R&D or acquisitions or strategic cooperation to promote the track layout.

First of all, professional apartment brands have basically formed an oligopoly, accounting for most of the overall serviced apartment market. This kind of brand has a long history and mature development, and each group has basically built a perfect brand system, covering different grades of market positioning. Secondly, as millennials have grown into the main consumer force, the evolution of serviced apartment products has accelerated, driven by various favorable policies. Through independent incubation, joint construction and acquisition, foreign veteran apartment groups, domestic real estate developers and hotel groups have created a number of apartment brands that keep pace with the times.

Compared with the development of the previous 20 years, the serviced apartment 1.0 era still takes asset holding and realization as the main profit model, and the serviced apartment 2.0 era that has been opened requires more brand output and diversified development. Mid-to-high-end hotel serviced apartment brands and creative theme brands emerged on this basis, and "grouping" with high-end hotel brands is also an important strategy under this trend.

The third is the dispute over the management model. Serviced apartments have the dual attributes of both the service industry and the real estate industry, and it is very similar to the business model of a hotel - management and assets, either to manage the output to make money, or to increase the value of assets to make money. This puts forward extremely high requirements for the operation and management ability of enterprises. Thanks to the risk cost, rapid expansion ability and high profitability, the asset-light model has become the choice of many apartment brands. For example, Vanke Boyu in the field of long-term rental apartments and Rubik's Cube Apartment, which is known for its medium assets, have begun to try asset-light business in recent years.

For brand apartment operators who have many years of mature operation experience, the asset-light model can output operation and management to achieve benefits at a lower capital cost, and it is also a way to rapidly expand scale and market share. However, there are not many companies that have really run this model through, and it is not easy to maintain long-term profitability.

With the acceleration of urbanization, the fluctuation of consumption structure, the change in the willingness of a new generation of young people to buy a house, and the growing demand for experiential consumption, the hotel apartment market has begun to release important signals. Hotel serviced apartments have entered the era of "refined management" from the era of "savage growth", and how to keep pace with the times to achieve refined operation and product upgrading has become a magic weapon for brands to occupy the commanding heights of the market.

What will the hotel and serviced apartments look like in the future?

In recent years, capital has been making continuous moves in the field of hotel and serviced apartments, and various types of players have entered the game one after another, prompting the continuous evolution and development of China's long-term rental apartment market. With the continuous introduction of various favorable housing rental policies at the national level, it is foreseeable that the competition in the new round of long-term rental apartment market will become more intense, and its business model will gradually mature with the development of the industry. What will the future of hotel and serviced apartments look like?

There will be more local brands to emerge

As we all know, although serviced apartments have been developing in the Chinese market for more than 30 years, their market share has long been dominated by foreign brands. With the vigorous development of China's economy and the change of Chinese people's consumption concept, the demand of business travel elites for serviced apartments is becoming more and more apparent. Therefore, in the future, there will be more local brands in the apartment market, and even go out of the "country", which will coexist with opportunities and challenges for local brands.

With the development of consumer demand and the maturity and improvement of the operation mechanism, there will be more brands with different positioning and different concepts in the future serviced apartment market. In the future, hotel serviced apartment products will be further subdivided, with more emphasis on design, personalization and sharing in product design, and more emphasis on social attributes and humanization in service. At the same time, it will also expand its own brand matrix based on the market and superimpose the brand voice.

Flexible leasing models may become the norm

Young graduates who don't have money to rent and can't afford to rent, and wealthy white-collar workers, executives, or influencers choose to downgrade in their respective workplace crises, the former hinders the penetration of long-term rental apartments into a larger user group, and the latter affects the high-end development of long-term rental apartment brands, both of which will bring structural changes to the long-term rental apartment market. Some long-term rental apartment brands are actively changing. For example, Vanke Boyu has launched a business model that combines long-term and short-term rentals, including launching short-term rentals for B-end customers, and the minimum lease period has been adjusted from one year to one month.

In the future, the hotel and serviced apartment market may introduce more flexible leasing models. In addition to the traditional long-term rental model, short-term rental, on-demand leasing and other forms will be more common. This flexible model is able to better adapt to the different needs of tenants, making the apartment market more flexible.

Build a complete business ecosystem

In the early days, hotel and serviced apartments focused more on how to get more houses and how to accommodate more tenants, but as Generation Z youth gradually stood on the stage of the times, sharing community ecology and continuous self-renewal have become the new tasks of serviced apartments. The horizontal cross-border development trend of serviced apartment products is highlighted, and more and more products actively embrace all kinds of guests through more flexible business models, and give full play to the imagination of products.

By building a full range of supporting facilities such as commercial + entertainment + housing, a community-based multi-format model has been formed, and serviced apartments have gradually moved from a single scattered residential apartment to an independent and complete super community. As the form of large and medium-sized rental communities has become the mainstream of the market, it has guided the development of the rental market in the direction of community, quality and life. Some leasing community businesses actively try to "a variety of formats and services", integrate into the urban fabric, guide the integration of industry, city and people, and form a benign ecological business closed loop.

To sum up, whether it is "buying" or "selling", it shows that hotel and serviced apartments are still a hot spot for all parties. At the same time, in the context of the current increasingly fierce competition in the accommodation industry, the hotel and serviced apartment market is showing signs of maturity, with a high degree of service standardization and branding. However, under the general trend of rapid development of housing rental, only by constantly cultivating internal skills, constantly "changing face" in the development of new markets and new customer groups, and finding their own foothold, is the answer to the brand.