The serviced apartment sector is on the rise. A hybrid between two more established concepts – residential apartments and hotels – extended-stay options of this kind are becoming increasingly popular. And with future expansion estimated at $10-15 billion, it is clear they are more than just a halfway house.

The idea itself is not new, having first arisen in the 1980s in the US. In effect, serviced apartments appeal to travellers who want something more long term than a standard hotel room and less binding than rental accommodation. Typically, they’ll wish to cater for themselves and won’t necessarily require all the amenities associated with a hotel. Equally, they don’t want to sign a lease or commit to a minimum length of stay.

While this model has long appealed to a certain subset of business traveller, the market has grown dramatically over the past ten years, particularly when it comes to internationally branded residences. As investors and travellers alike become better acquainted with the benefits, more major brands are entering the sector and catering to a burgeoning clientele.

This shift is occurring worldwide. Although supply varies significantly from region to region, today’s hyper-mobile workforce is stirring demand from Sydney to Singapore. According to a recent report by The Apartment Service, 94% of operators across all regions have registered a growing interest in serviced apartments.

"Demand always paves the way for growth, and it’s important to sustain that growth and keep it going," says Samer Khanfar, general manager of the Jumeirah Living World Trade Centre Residences in Dubai. "Guests seek high standards and efficiency, and with the right product and services, our branded serviced apartments are the perfect option. They are far more economical and offer the best of both worlds – a hotel and a home environment."


Apartment story
Dubai is particularly interesting as a microcosm of broader trends. Given its substantial expatriate community and growing popularity as a holiday destination, demand for long-stay accommodation is booming. Since the end of the global financial crisis, the number of tourists visiting the emirate has grown year on year.

While hospitality in this region was initially concentrated on high-end luxury hotels, the government recently instigated a push towards more mid-range accommodation. Serviced apartments – which frequently fall into this bracket – now account for 28% of the room stock in Dubai, with 24,924 rooms as of August 2014 and 6,052 more in the pipeline.

"Developments in the region have been relatively aggressive over the past couple of years," says Hala Choufany, regional managing director of HVS Dubai. "That is no different to what Europe saw 50 years ago. Naturally, any market going through the development phase starts off with hotels, specifically five-star, then four-star, then starts contemplating serviced apartments and budget."

If they are here on a five-day stay, it’s home-like and convenient, and probably more efficient from a budget-control point of view.

These serviced apartments are well placed to capitalise on corporate and leisure travel. Dubai is renowned as a business hub, with a quarter of all Fortune 500 companies maintaining a presence in the emirate. A sizeable number of employees have come in from elsewhere and may require corporate housing as an interim measure while they seek out something more permanent.

"People brought in for certain jobs and missions initially tend to stay in serviced apartments," says Choufany. "In places like Saudi Arabia, there’s a waiting list of a year for permanent housing, so a serviced apartment is a very good alternative. In Dubai, those who are here for the shorter term may not necessarily want to sign a one-year contract. There is a very strong corporate demand for serviced apartments because of the expatriate nature of these cities."

On the leisure travel side, the vast majority of interest comes from families. Travelling from other parts of the Middle East, such as Saudi Arabia, these families are typically large by European standards and require more space than you would find in a hotel. Serviced apartments – measuring 60-70m2 as opposed to 35-40m2 – are more likely to fit the bill.

"If they are here on a five-day stay, it’s home-like and convenient, and probably more efficient from a budget-control point of view," says Marc Descrozaille, regional director for UAE, Egypt and Jordan at Carlson Rezidor Hotel Group. "To get the equivalent space within a normal hotel, you would typically go for two rooms or a suite, which would be more expensive than the serviced apartment option."

Just as pertinently, serviced apartments are devoid of potential to offend. Many hotels in Dubai target themselves at a broad clientele, which means alcohol will be permitted on site and restaurants cater to an international palate. By contrast, the apartments are typically dry and always include kitchenette facilities. This has its advantages, though it can prove tricky for large hotel companies with an established business model.

"The lack of alcohol is an issue for some clients and a benefit for others," says Descrozaille. "A typical Kuwaiti or Saudi family would see a lot of value in going somewhere with no alcohol, but from a brand-purity point of view, in a Radisson Blu you need to have alcohol, so it’s a challenge."


Standard deviation
Currently, the serviced apartments in Dubai are split relatively evenly between unbranded, locally branded and internationally branded offerings – at 38, 32 and 30% respectively. However, international brands are starting to realise how lucrative the sector may prove to be. Over the coming years, there will be a raft of new developments in Dubai and across the whole Middle East.

Carlson Rezidor, for instance, has six new serviced apartment offerings in the pipeline. Operating under the upscale Radisson Blu and the mid-scale Park Inn by Radisson brands, it is due to open three in Dubai and three in Saudi Arabia, alongside another property further afield in Mozambique.

Meanwhile, Marriott has a dedicated extended stay brand, Residence Inn, with properties in Bahrain, Saudi Arabia and, most recently Kuwait. Starwood is looking to expand its Element brand to the region, and InterContinental Hotels Group already has a number of operational suites. Purely residential operators such as Ascott and Fraser are also placing a renewed focus on the Middle East.

"A lot of the users of the local business are using them because they have no choice," says Choufany. "But once there are more internationally branded chains hotels opening up, this business is going to move towards and stay with international hotels."

One of the critical points is to make sure we are not just opening and developing hotels with bigger units – serviced apartments need to be something different.

At present, because the market is new, it is suffering from a lack of standardisation. As Descrozaille explains, the next step for Carlson Rezidor will be to create a more cohesive brand identity.

"I was recently asked to head a small new committee that’s going to look into more design offerings for serviced apartments," he says.

"One of the critical points here is to make sure we are not just opening and developing hotels with bigger units – serviced apartments need to be something different. What do we want to have in the kitchenette? Do we have enough space in the lobby area? Many of these questions at the moment are answered on an ad-hoc basis, and we need to have a more strategic approach."


Frill ride
From an investment standpoint, serviced apartments present certain opportunities not offered by hotels. Firstly, they have more-stable occupancy levels, which minimises the risk inherent in a seasonal model. Secondly, they are generally cheaper to operate – and without the need for on-site restaurants and facilities, the capital investment is lower. Finally, if the venture doesn’t work out, the building can be easily sold-on as a residential asset.

If there are difficulties, these are apt to lie in clients’ expectations; there is still some confusion about what serviced apartments actually entail. Still, for a client seeking all the frills, they won’t necessarily be disappointed. Certain serviced apartments are annexed to hotels, and larger properties such as Jumeirah’s Living World Trade Centre Residences typically provide their own dining areas, pool and gym.

Choufany believes the region holds significant promise. "There’s a lot of potential in the Middle East. With the exception of Dubai, this sector is not well established, and there’s a lot of demand for serviced apartment accommodation."

"We feel the market is still strong and has the capacity to absorb more serviced apartments," agrees Khanfar. "For many guests, a high standard of serviced apartment has become their best option, providing them with effortless living, comfort and personal space."

As this sector continues to evolve, it is poised to claw back ground from hotels and rental accommodation. With demand surging across the Middle East, we can be sure that supply is set to snowball.