Fraser Suites Top Glory, a new five-star serviced apartment complex in Shanghai’s Lujiazui district, opened its doors in late October, just as news of the economic downturn began to worsen. But the impending slowdown in China is not a worry for Choe Peng Sum, CEO of Singapore-based Frasers Hospitality. In fact, in his view, it is a genuine growth opportunity.
“My strategy is to grow deep into the recession,” says Choe. “We are optimistic, and maybe that sounds a little too bullish, but frankly, a lot of residential property developments are not selling as fast right now. So, you get a lot of owners and developers who are converting their properties to serviced apartments rather than selling them, especially if they are in very prime locations, and that is exactly our market.”
During every economic downturn, certain businesses prosper. The current downturn, which began in the 3rd quarter, has placed the spotlight on serviced apartments — short-term residencies that come with furniture and various amenities — as an unexpectedly robust countercyclical industry. This sector of the accommodation industry, virtually unheard-of only a few years ago, is taking full advantage of the slump in residential property sales to accelerate its growth in China and the rest of Asia.
Residential property price appreciation in China has been declining steadily and transaction volumes have plunged as the credit crisis has worsened. Property prices in 70 major Chinese cities have fallen throughout the year: In February, housing prices in 70 major Chinese cities rose 10.9%, according to the National Bureau of Statistics. By August, the appreciation had slowed to 5.3%, and in September, it was just 1.6%. Transaction volume has dropped as well, says Choe, as banks tighten their lending standards and would-be buyers take a wait-and-see approach to the market.
As the property market slows, developers of residential property are often unwilling to sell their apartment blocks at the new, lower-than-expected prices, but they are keen to lease the blocks to professional serviced apartment management chains. The developers still retain ownership of the properties, so if the residential market improves, they can sell them; but in the meantime, they earn steady income from their developments.
On the demand side as well, the serviced apartment business is recession-resistant. Serviced apartments are aimed directly at the most lucrative sector of the travel market: the “road warrior” businessmen and women who spend weeks and even months away from home each year. The top serviced apartment chains offer most of the perks of a five-star hotel, including maid service, fitness centers, 24-hour front desk service and corporate discounts, and they allow guests to settle in to a home-like living space for months at a time.
In the new economic environment, business travelers are looking for new ways to save money, and serviced apartments are normally cheaper than comparable hotels. At the newly opened Fraser Suites Top Glory, a traveler can rent a spacious two-bedroom apartment for about US$200 per day during the opening period, a rate that is less than a similar five-star hotel. But the serviced apartment guest gets two bedrooms, a study, a dining room, a living room and a kitchen, along with a central location and many of the services offered by a hotel.
And because they normally sign long-term leases – usually three to six months, although often up to a year or more — serviced apartment renters have significant leverage, and can often secure attractive rates.
“The economic situation may have an impact on travel; however, as our residents usually stay for a longer term on projects or relocation, our serviced residences are more resilient to a sudden downturn in travel caused by the economic slowdown,” says Gerald Lee, CEO of Ascott Hospitality, a subsidiary of The Ascott Group, the world’s largest operator of serviced apartments. “Serviced residences remain attractive for companies even in a challenging time like these because they give companies the flexibility to accommodate their staff for an extended period without having to commit to long leases.”
Serviced apartments also help reduce daily expenses, as frugal travelers can cook their own food, wash their own clothes, and reduce their telephone and Internet charges. In addition, more than one employee can stay in a serviced apartment. “It gives companies the flexibility to have a group of staff share a serviced apartment instead of putting them up in individual hotel rooms,” says Lee.
So far, despite the worsening global slowdown, the serviced apartment market has proven buoyant. “The serviced apartment market is still going very well,” says Naomi Milne, business development manager for SACO, a UK-based company that owns and manages 400 serviced apartment units in the UK, and markets another 12,000 units worldwide. “One of the major advantages is that corporate clients see a cost benefit in staying in serviced apartments. In hotels, historically they have bar bills, very high Internet charges, restaurant bills, and inflated telephone charges, and going to a serviced apartment eliminates quite a few of those costs.”
Factor in the cheap rent, and it adds up to a powerful sales pitch. Short-term visitors tend to stay in hotels, but long-staying guests – those who stay longer than a week – often choose corporate housing. Government or business consultants on temporary assignment, managers and executives on medium-term projects, and expats looking for permanent housing: these are bread-and-butter guests for serviced apartments. “A lot of regular travelers are becoming more educated about serviced apartments, and their companies are supporting and bringing in serviced apartment programs as an alternative to, or alongside, their hotels programs,” says Milne.
Serviced apartments are also moving into the leisure travel market. “We are opening to the leisure market, and these days the leisure market predominately will be those with families, rather than couples or singles,” says Choe of Frasers Hospitality. “If it’s three or four days they can still stay in a hotel, but if they travel with their families, a serviced apartment is different from taking two or three hotel rooms. It is a semblance of a home and they are together, so there is a big market for that.”
Fuelled on the supply side by the sudden availability of luxury apartment blocks that can be converted to serviced apartments, and on the demand side by business travelers who wish to save money, serviced apartments are expanding rapidly in China, where they are the fastest-growing segment of the accommodation market.
The leading serviced apartment companies in Asia — Ascott Group, Frasers Hospitality and Oakwood Asia-Pacific — are all targeting further expansion in China. Frasers Hospitality now has nine properties in China, including a just-opened property in Hong Kong, and plans to open at least five more by 2010, says Choe. Future Frasers properties will likely be in Tianjin, Guangzhou, Chengdu, Dalian, Suzhou, Xian, Chongqing, Hangzhou and Wuxi.
Ascott, the world’s largest serviced apartment chain with 18,000 units now in service, has another 6,000 units in its global pipeline. In China, it currently operates 17 properties offering more than 5,000 units, and plans to open another 10 apartment blocks by the end of 2010, says Lee.
Oakwood Asia-Pacific, the number three chain in Asia, currently has three serviced apartments in China – two in Beijing and one in Guangzhou – and it plans to open two more within the next few months, in Hangzhou and Shanghai, and a third in Beijing in 2010. Altogether, the group will add 26 new serviced apartment properties in Asia by 2011.
Aside from their recession-resistant business models, the chains are optimistic about the long-term health of China’s economy. “Multinational companies will look to expand in China and India as they face greater pressures to reduce labor costs,” says Lee of Ascott Hospitality. “As multinational companies set up or expand their operations in these markets, there will be demand for quality, international-class accommodation.”
Serviced Apartments vs. Hotels
While serviced apartments are generally prospering during the downturn, the hotel industry in China is beginning to suffer. The situation is worst in Beijing, which has excess supply due to the enormous hotel-building boom that took place there prior to the Summer Olympics. However, the Chinese government launched an unexpected visa crackdown during the games, sharply restricting the number of inbound visitors, and many of the hotels never fully recovered.
“It’s been a kind of a difficult picture, a hazy picture this year, because of the Olympics and the visa challenges,” says Simeon Olle, general manager of the newly opened Park Hyatt Beijing. “But we are now going into the traditional quiet period, winter, and then March and April may be a strong period. But will it be as strong as it was during the last three years? Time will tell.”
In Shanghai, the hotel outlook is also gloomy, and for similar reasons: excess supply in the face of falling demand. Officially, the hotels are optimistic, but off the record, they are worried. The Shanghai flagship property of one famous U.S. chain reported an occupancy rate of just 35% in mid November, the traditional high season when occupancies are normally in the high 80s. A marketing executive from another Shanghai-based five star hotel, also a U.S. chain, reported that its MICE (meetings, incentives, conventions and exhibitions) business had dried up completely. “There was a downturn during the Beijing Olympics, and we never really recovered,” he said. And in Macau, cranes have stopped moving altogether at the Cotai Strip complex, a grandiose development that once planned to build 14 hotels and 20,000 guest rooms, but has stopped work completely, with just two hotels built.
At the same time, tourism into China is beginning to slump. According to the China National Tourism Administration, the number of inbound tourists coming into China in September 2008 decreased 5.94% from the previous year, to 10.56 million, and that was before the global credit crisis worsened in October. Even more worrisome is the fact that tourism revenue shrank 11.36% in the same month. From January to September of this year, revenue slumped 3.26%, the administration said.
Hotels have higher operating costs than serviced apartments, because they employ more staff, and because they run a more complicated hospitality business that includes restaurants, conventions, meetings, banquets, weddings and other services. They also do not have the advantage of being able to expand by purchasing unsold luxury residential developments during a downturn, the way serviced apartments do, because hotel buildings are not like luxury apartments: they have ballrooms, a large number of restaurants and bars, and meeting rooms and other facilities, all of which must be designed early into the architecture of the property.
In the end, hotels can only cut their rates, and hope that tourism rebounds. “I think in the next couple of years the demand is going to have to catch up to the supply, and I think the large hotels are probably going to have to change their business strategy a little bit,” says Olle, of the Park Hyatt Beijing. “They are going to find that the client is going to be more savvy and they are going to have to fight a little bit more for business.”
At the same time, some chains are slowing their expansions. “Looking at the market now, we are taking a back seat and waiting for the right opportunity,” says Yenn Wong, owner of JIA, which operates two boutique hotels, one in Shanghai and one in Hong Kong. “We were looking initially, but now that the market has crashed, we have decided to wait for the right opportunity to acquire a good asset. China is a great place, but it is very challenging.”
Some hotel chains, especially Marriott and Four Seasons, have responded by opened serviced apartments of their own. Marriott International has three Marriott Executive Apartments in China, and nine in Asia, in its global portfolio of 19 serviced apartments, while Four Seasons operates serviced apartments in Kuala Lumpur, Macau, and Hong Kong, where its Four Seasons Place has proven very successful.
Marriott International is looking to expand its portfolio of serviced apartments in China, says area vice president of sales and marketing, Lawrence Ng. “If you look at Beijing, we have one MEA (Marriott Executive Apartment) there right now, and we will open another one in the next three to six months, and we have two MEAs in Shanghai right now, so for Marriott we look at serviced apartments as a pretty promising and positive area where we can grow our business and market share.”
Drawbacks of a Downturn
Recession-resistant though serviced apartments may be, prolonged economic downturns do have drawbacks for the top chains. On the shorter-stay end, hotels respond by offering more attractive rates, especially for rentals of more than a few days, and on the longer-stay end, at leases of six months or more, empty luxury apartments begin to compete with serviced apartments, by offering cheaper leases.
After six months or a year in a serviced apartment, some guests prefer to rent a regular apartment. “We are going for the longer term clientele, but we then fall smack into the ranks of the rental market, competing with the villas and apartments,” says Choe of Frasers Hospitality.
Hotels are already beginning to respond by cutting their rates. “Hotels have been discounting in some cities for the last 12 to 18 months gradually, so now we do find some of them are offering very competitive rates,” says Milne of SACO. “That means you’ve got to promote the added benefits of a serviced apartment compared to a hotel. If you’ve got someone staying there for more than a couple of weeks, a hotel is not always suitable, so it is a matter of educating them about the benefits and advantages of a serviced apartment.”
And naturally, during recessions, business clients drive harder bargains. “A lot of the corporate companies are keen on more flexible leases, rather than locking in for a one-year or two-year lease,” says Choe. As business prospects worsen, they prefer to sign a series of one-month leases, he says, rather than making a long-term commitment.
But in the end, the downturn is a solid expansion opportunity. Sometimes the serviced apartment chains take equity in the properties they manage, but more often, they simply manage properties that are owned by someone else, usually property developers. And lately, those developers have been happy to hook up with the serviced apartment operators.
“Even in a fire sale I don’t think many developers will get the prices that they want, and to just keep holding on to their assets entails a huge holding cost,” says Choe. “So it is a very funny contrarian view, but in times like these we are actually getting a lot more leads and a lot of interest. It sounds like a dream world, but basically we are within our reach of [our goal of] 8,000 apartment units within 2010.”