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At your service
As the serviced-apartment industry continues to go from strength to strength, Alex Frew McMillan takes a look at current trends
Serviced apartments have been something of an overnight success story in Hong Kong. Flourishing in this decade, they have filled a need for long-stay but flexible housing that wasn’t previously being met. In the recent property slump, serviced-apartment rates fell less than both office and residential rents.
Surprisingly, given their popularity, there’s no formal definition of what a “serviced apartment” is in Hong Kong. But since they offer great potential returns for developers, they are only likely to become more prominent on the local real estate scene.
Serviced apartments were once set aside as a formal category of property in the city, according to the zoning plans made by the Town Planning Board. But the board stripped all reference to serviced apartments out of the rules and regulations in 2000.
Nowadays, a serviced apartment is either technically a hotel that has long-stay suites, or an ordinary residential development that offers housekeeping. Since hotels are a subcategory of commercial property in Hong Kong, which has a lower land-use premium and higher plot ratios than residential, it is cheaper for a serviced-apartment company to operate its projects as a hotel. But to meet those requirements, the serviced-apartment complex typically has to organise hotel-style access, taxi bays and safety standards, and none of the units can be sold off. By contrast, in a residential development, the owner can sell some of the units and operate others as serviced apartments if he prefers that kind of business model.
Serviced apartments first appeared in Hong Kong in the 1980s, when the city was making its transformation from an industry base of light manufacturing to a financial and business-services centre. The transition brought a wave of overseas investment and multinational companies into Hong Kong, often with executives who were either expatriates or who travelled frequently to China in tow, or both. They wanted somewhere to stay that was more personal and long-term than a hotel but without having to commit to a two-year lease.
The New World Apartments in Tsim Sha Tsui was one of the first purpose-built serviced-apartment complexes, followed by Convention Plaza Apartments in Wanchai and Hong Kong Parkview Apartments in Tai Tam.
For Wharf (Holdings) Ltd, The Gateway Apartments in Harbour analysisCity Tsim Sha Tsui has been a runaway success, since the opening in 1999. The 499 deluxe units offer a strategic accommodation solution particularly for executives working in the 4.35-million-square-feet of Grade-A office space in The Gateway, along with Ocean Centre, World Finance Centre (North and South Towers), Wharf T & T Centre and World Commercial Centre. As with any serviced apartment, location is critical, and besides close proximity to the MTR, buses and Star Ferry, Gateway Apartments is a five-minute drive to the Airport Express Kowloon Station, and right next door to the ferry terminal for jetfoils to the mainland and Macau. Use of the exclusive 140,000-square-foot Pacific Club with health, spa, dining and business facilities is an additional attraction, as is the proximity to Harbour City, Hong Kong’s largest mall.
Despite these early successes, the industry only really began to pick up steam in 2000, when chain serviced-apartment developers started to open multiple locations around the city. Of the 14,400 serviced apartments currently in Hong Kong, almost 70 percent were opened in this decade. Of those, 48 percent are on Hong Kong Island, 40 percent in Kowloon and only 12 percent in the New Territories. It’s a similar breakdown to the way Grade A office space is distributed in Hong Kong, not surprising since the people who live in serviced apartments tend to work in such office buildings.
Central, Wanchai and Causeway Bay are the heart of the serviced-apartment industry on Hong Kong Island, while Hung Hom – with the 1,662-unit Harbourfront Horizon complex and the 1,980-apartment Harbourview Horizon complex – is serviced-apartment central in Kowloon. Hung Hom is particularly popular with executives who do a lot of business across the border in China, since it is next to the through-train station for Guangzhou and other cities in Guangdong.
As the industry expands, serviced apartments are springing up in neighbouring areas such as Tsim Sha Tsui, Happy Valley, Mid-Levels and Quarry Bay.
Jones Lang LaSalle (JLL), which recently released a 19-page report on serviced apartments in Hong Kong, tracks 21 major developers in the city. By far the largest is Cheung Kong’s Horizon Hotels and Suites Ltd, which has 4,770 serviced apartments in Kowloon and the New Territories, including those two major Hung Hom developments. No single other developer has more than 1,000 units, with Hang Lung Properties the next-largest, with 890 units in Kornhill Apartment Serviced Suites on Hong Kong Island and The Bay Bridge Studios in the New Territories, followed by Sun Hung Kai Properties and its 790 serviced apartments in HarbourView Place in West Kowloon and Four Seasons Place next to the International Finance Centre.
So the three biggest serviced-apartment operators are three of Hong Kong’s biggest property developers. New World Properties and Hopewell Real Estate have also got in on the act. Major developers see the serviced-apartment industry as a way of diversifying their property portfolio, a strategy that has recently served them well.
“It is now a big business with growing investment demand from institutional investors,” Marcos Chan, Anne-Marie Sage and William Lai write in the JLL report. “The sustained leasing demand, coupled with the positive impact from chained operations, helped safeguard serviced-apartment rents from falling too drastically in the aftermath of the financial crisis last year – at least they have fared much better than the ordinary residential leasing market.”
The largest company focused exclusively on serviced apartments is Shama, which has 450 units in eight locations around Hong Kong. It has spawned competitors such as Kush Concept, Home2Home Lifestyles Management and Chi International, which each have three or four serviced-apartment developments that strive for a distinctive, boutique-hotel-inspired style. Some feel more like nightclubs than hotels.
Branding and image are becoming more and more important for serviced apartments. Although location is a key consideration, most serviced apartments are set up on the fringe of the central business districts, making it hard to make this a meaningful point of comparison. The location is almost always good.
Instead, the serviced-apartment operators try to lure in customers by offering high-tech facilities, in-house amenities, and special services such as membership to health clubs and assistance with booking restaurants.
Although serviced apartments weren’t initially much different from hotel rooms, they’re now expected to have a greater sense of style and comfort. Shama, Chi and Kush go for various themes incorporating concepts from Zen Buddhism, lounge chic and minimalist design that help make their tenants feel relaxed and at home. They tend to have smaller, studio-style units that appeal to young professionals.
“The feel and image of staying in a serviced apartment can sometimes charm tenants,” the JLL report authors note. “In addition to providing a basic sheltering function, serviced apartments are typically associated with an iconic lifestyle, which requires tailored designs, furnishings and facilities.”
Major developers have not let the trend go unnoticed. Hopewell’s Garden East development in Wanchai, a 28-floor, 216-unit serviced-apartment block, was unveiled earlier this year with a “green” theme. Of course, anybody who has any sense is touting their project as green in the current climate, but the project does have a plant-strewn fifth-floor podium and roof, and a 5,000-square-foot garden on the ground floor that was landscaped by Philip Liao & Partners. The interiors of the units use natural materials and a green colour scheme.
One area of the serviced-apartment industry that operators have been ignoring is the market for long-stay units that can house whole families. The industry was originally set up to serve professionals who left their spouse and kids back home. But increasingly, globe-trotting executives are keen to bring their families with them. Serviced apartments are also popular for families that are new in town and don’t yet know where they want to live. Instead of committing to a long-term lease or a property purchase, a serviced-apartment stay allows tenants to “test drive” a neighbourhood and move on if they don’t like it.
JLL notes in its report that the stock of two- or three-bedroom serviced apartments has in fact declined recently – The Atrium closed in Admiralty last year. The only newcomers are Sun Hung Kai’s Four Seasons Place and The HarbourView Place. But The Repulse Bay Residences will open at 129 Repulse Bay Road towards the end of this year, again with larger units.
If there is a market niche to fill, developers will likely fill it. What’s more, serviced apartments are an attractive option for owners of clapped-out office buildings or run-down residential blocks. In most cases, conversion to serviced apartments will command higher rents and occupancy rates.
JLL broke the numbers down for a 50,000-square-foot space. Using the building as Grade C office space, a landlord can command a first-year rental of HK$15 per square foot and will generate a rate of return of 4.6 percent, meaning the project will pay back the cost of outfitting in 19 years. By comparison, using the same space for boutique-serviced apartments commands a first-year rental of HK$35 per square foot, an 8.3 percent rate of return – almost double – and the project will pay for itself after 11 years.
There are 56,000 hotel rooms in Hong Kong, four times as many the number of serviced apartments. But future competition is likely to be fierce with serviced apartments, which are to some degree benefiting from the unstable work conditions produced by the recent downturn, the high mobility of employees the slump has exaggerated and the large number of regional headquarters in Hong Kong. As employees come and go with increasing frequency, expect more and more serviced apartments to stay.
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