For business and leisure travellers, serviced apartments hold a certain type of appeal, becausecompared to a “traditional” hotel they provide greater flexibility, more privacy, the freedom to serve yourself as and when required, and space to entertain, and they can work out to be greater value for money due to the absence of extensive facilities that the long-stay guest rarely uses.

The challenging global economic climate means that companies are looking for easier and more cost-effective ways to provide accommodation for relocating employees, as well as those on long-term assignments. As more work contractsare negotiated for the short-term, serviced apartments are an increasingly attractivecost-efficient option for employers to house their staff, as opposed to the former days of sourcing for, furnishingand servicing expatriate accommodation (apartments and houses) in Africa.

At the basic level, serviced apartments are self-catering furnished apartment units with electricity, Wi-Fi and cleaning provided. They do not usually have restaurants or bars within their complex, but may offer a pool and gym. Along the spectrum, the service offerings increase with more luxury apartments with additional services such as 24-hour concierge, swimming pools, gyms, spas, restaurants and bars.

The term “serviced apartments” includesaparthotels, also known as extended-stay hotels, as well as branded residences, where the apartments, which are the owner’s permanent home, are managed by a hotel operator, often at the upper scale of quality. Aparthotelunits can vary from studio units – essentially a large hotel room with a kitchenette and dining table – to one, two and (occasionally) three-bedroomed apartments. The most popular of these arestudios and one-bedroom apartments, catering to the single business traveller.

Whilst serviced apartment complexes tend to be independent of any hotel chain, aparthotels and extended stay hotels are a sector of the lodging industry that the hotel chains have targeted for some time, especially in the USA.  The “combo” development, where the extended stay units are adjacent to a full-service hotel, brings advantages to all involved – the guest, the operator and the investor.  Guests can use the hotel facilities, whilst maintaining the privacy of staying in a separate location from a hotel, in a less-busy facility. According to Cycas CEO John Wagner, a pioneer of the extended-stay sector in Europe, quoted in the The Global Serviced Apartments Industry Report 2015/16 by The Apartment Service, dual-branded lodging offers have lower costs and are able to optimise the provision of services such as maintenance, housekeeping and security, where one team is required for both the hotel and serviced apartments, as compared to if the two were separately-located projects.

In terms of supply, the global provision of serviced apartments has grown from around 402,000 apartments in 6,722 locations in 2008 to 775,336 apartments in 9,961 locations in 2014, according to The Apartment Service. According to WATG’s 2015 report Serviced Apartments – Checking in for the Long Term, 70 percent of the demand for serviced apartments is from corporate travellers. Relocation is the biggest force driving the demand for serviced apartments. Relocation agencies responsible for sorting out short and long-term housing are increasingly looking to serviced apartments to meet short-term housing requirements,, although some companies are reluctant to use unbranded serviced apartments because they have less confidence intheir security procedures.

In terms of demand, there has been an increase in demand for serviced apartments and extended-stay accommodation from leisure travellers, particularly families and groups of friends who are travelling together, as serviced apartments are seen as a better alternative to hotels, with far fewer restrictions.

Location is an important factor in the demand for serviced apartments. According to Jack DeBoer of WaterWalk, quoted in the WATG report, serviced apartments should be located close to class A office spaces, to allow for short commutes between accommodation and work spaces, given traffic conditions in many African cities.

Whilst the strong demand dynamics present positive investment indices, the serviced apartment segment of the hospitality industry is not without its challenges. As the sector straddles the residential and hotel markets, it can be difficult to classify the product, it being a hybrid between a hotel room and a rental apartment.Consumers are also not aware of the range of serviced apartment offerings. Whilst 72 percent of business travellers are aware of serviced apartment products, only 52 percent are aware of extended stay products, according to Hotel Analyst (November/December 2015).

The sector is relatively unproven when compared with mainstream real estate investment products, including full service hotels, and in this regard, some investors view it as more risky, which is really not the case. The existing serviced apartment supply mostly caters to the mid-market, but there are real opportunities for greater coverage of the market, to cater across the spectrum from basic to luxury service levels.The serviced apartments market is presently very fragmented, with an inconsistent quality and provision of guest facilities, and the lack of recognised brands – the vast majority of serviced apartments and other extended stay accommodation products are unbranded. More standardisation and clarity in the classification of the type of products being offered, and the branding and management of these products, will contribute to better understanding of what serviced apartments and extended stay lodging products can offer to investors and guests alike.

Some hotel chains are looking to bring their brands into Africa, such as Residence Inn looking to open in Kampala; MarriottExecutive Apartments in Addis Ababa (where they opened in late 2015, the first Marriott-branded hotel in sub-Saharan Africa), and with a project on the books in Abuja; Fraser Suites also planning an opening in Abuja;Accor’s Adagio is seeking a presence;and Starwood have their firstElement extended-stay hotel opening in Dar es Salaam shortly.

Whilst Africa has the land area of the USA, China, and Western Europe combined, with space to spare, the continent is hugely underserved in the provision of international quality accommodation, both hotels and serviced apartments. The distance of most African markets from demand generators in Europe, Asia and North America means that those coming for business and for projects tend to stay for longer periods.

According to The Apartment Service, there has been a rise in the provision of serviced apartments in Africa, from 4,634 apartments in 76 locations in 2013 to about 8,802 units in 102 locations in 2015Yet this figure comprises only 1.1% of the total provision of serviced apartments globally. There is therefore a lot of scope for investors to active engage with the sector. Within Africa, markets with a strong demand include the primary cities in countries such as Nigeria, Ghana, Tanzania, Côte d’Ivoire, South Africa, Ethiopia and Kenya.

There is significant opportunity for those prepared to develop and operate serviced apartments and extended stay hotels, and for private equity to invest in a sector which can provide higher rewards.Serviced apartments, when compared to full service hotels, require less food and beverage provision, and therefore have lower investments requirements (less built space), provide greater efficiency – the space reserved for back of house supports can be converted to more keys for the serviced apartments – and due to their lower staffing requirements, an average of 0.2 employees per key compared to 1 or more employees per key for the average full-service business hotel, serviced apartments also have lower operating costs.

Serviced apartments typically experience higher occupancy rates, due to their long-stay nature, which result in higher returns. The sector also has higher returns on average than hotels, averaging about 21.2% IRR when compared to the 17.3% that hotels provide on average, according to WATG and The Apartment Service.

Yet, there remains a lack of clear information about the service level offerings, providing difficulties for investors to understand the asset class, thereby reducing the attractiveness of the sector to investors.The sector remains insular and can benefit from strategic communications to make investors aware of the potential it has, and to stimulate investment in the sector. The industry needs to become more sophisticated with the development of an asset class for serviced apartments, and developing a more institutionalised grade investment product. The serviced apartment industry is vastly under-developed in Africa, with significant opportunities for investors, the hotel chains and, of course, the guests.

Trevor Ward

W Hospitality Group, Lagos

trevor.ward@w-hospitalitygroup.com