To escape the low margins in residential development, many project developers have discovered serviced apartments as a product for themselves in recent years. But what services are offered? And does it really pay off?

Basically, the term serviced apartments covers a wide spectrum, ranging from partially furnished apartments to de facto hotel operations.

As different as the concept may be, the economic logic can usually be reduced to 3 core topics:

1. Occupancy management

This issue is about the provider making an additional profit from taking on the occupancy risk. Due to the temporary nature of their offer and the omission of the one-year cancellation waiver, serviced apartments have, quasi by definition, a lower occupancy rate than classic apartments. The developer or operator relies on good occupancy management to ensure that the higher prices more than compensate for this lower occupancy.

2. Profit from additional services (services / furnishing)

The idea behind this point is ultimately to expand into other business areas, such as furniture rental and (concierge) services, and thus increase profits through additional sales.

3. Avoid market intervention

Legal framework conditions can sometimes lead to rental prices that are below the "market price" that would result purely on the basis of supply and demand. The best example is mandatory „guideline rents“ in many Viennese districts.

The rental of furniture and the provision of services do not fall under such interventions, so that the effects of the interventions can be mitigated by joint or bundled conclusion of rental and service contracts. At this point, I will refrain from a moral discussion of such a procedure, in which I believe both parties have very good arguments. Legally, such bundling is not without its difficulties and should therefore be examined by experienced lawyers.

Legal is a good keyword. In contrast to apartments, different rules apply in many respects.

Among the most important differences are:

1. Different dedication requirements

Unlike traditional apartments, serviced apartments can easily constitute a commercial business, so a commercial rather than residential dedication is required here. Given the increased price of land with residential dedication in recent years, this may be an advantage from a developer's perspective. However, it should be noted that the alternative disposition of a single sale is not possible here in the event that occupancy is not as planned. Likewise, attention should be paid to the residential zoning issue, which makes the commercial operation of serviced apartments impossible.

2. Different type of contract

In contrast to classic rental apartments, serviced apartments are regularly subject to accommodation contracts. A detailed list of the main differences would go too far at this point. However, Google has the details if needed..

3. Different requirements for parking spaces

Compared to classic apartments, serviced apartments have a reduced parking space requirement. Especially in times when developers produce half-empty garages due to legal requirements, this advantage should not be underestimated.

With regard to the target groups for serviced apartments, two main types can be distinguished:

• Menschen, die aufgrund ihrer Lebensumstände, z.B. in Folge von Trennungen, zeitlich beschränkt einen „atypischen“ Bedarf haben
• Menschen, die aufgrund eines plötzlichen oder temporären (Arbeits-)ortwechsels einen „atypischen“ Bedarf haben

In Hinblick auf eine Beurteilung der Wirtschaftlichkeit lässt sich zunächst sagen, dass die Geschäftsmodelle der Betreiber unabhängig von der konkreten Zielgruppe zumeist auf dem Auslastungsmanagement beruhen. Bei Services wie Reinigungen werden „Schwarzpreise“ erwartet, die man als professioneller Anbieter nicht (legal) anbieten kann. Bei der Möblierung zeigt sich, dass viele Leute in einem Hotel oder Serviced Apartment einen höheren Standard erwarten als sie ihn sich selbst leisten würden.

In practice, the trend is therefore toward apartments with low services (max. package receipt/weekly cleaning/towel service) and furnishings in the slightly upscale segment, with the aim of reaching as many people as possible in the target group.

Prices for serviced apartments in good locations are usually in the range of EUR 35-40/m² gross/month, i.e. in a rough range of approx. EUR 1,200 - 2,500 depending on the size of the apartment, whereby house and apartment operating costs (heating, water, electricity, TV, Internet, etc.) are priced in at EUR 8-10/m². In practice, this leaves monthly net costs of around EUR 18-25 / m², of which vacancy and additional depreciation for furnishing / replacement of GWG must be paid. AfA and replacement of GWG roughly amount to EUR 4-6 / m² net. If you talk to operators, you get target values for occupancy in a range of 85% - 90%.

If we now use the average values, we arrive at a net rent / m² of: (gross price EUR 37.5*(1-10% VAT) - operating costs EUR 9)* occupancy 85% - depreciation EUR 5 = EUR 16

For the sake of simplicity, we assume at this point that management not covered by operating costs is self-supporting through additional services. This, however, requires a good operational concept in practice.

This compares with rental income of EUR 13* occupancy rate 95% = EUR 12.5 for a comparable location.

The above sample calculation shows that serviced apartments are somewhat more profitable than classic apartments with an occupancy rate between hotel and apartment business, which must be the case in view of the higher risk. However, it should not be forgotten in the final assessment that the exit yields of serviced apartments are somewhat higher than those of apartments. Assuming an exit yield of 2.5% for conventional apartments in the above example, the required exit yield for serviced apartments would be around 3.2% to achieve the same sales price. Speaking of exit; in my experience, investors want to push for a hybrid model when buying serviced apartments in order to avoid that profits from the operation remain with the operator, but the risk via bankruptcy of the operating company ultimately remains with them.

In summary, it can be said in my experience that

• serviced apartments work almost only as single apartments with the target group "well-off (neo-)singles" (exception: dormitories),
• the furnishings have to look elegant, but objectively must not be expensive,
• services should only be offered to a limited extent,
• serviced apartments should achieve somewhat better returns than classic apartments, and
• the competence of operation and re-letting or occupancy management is the decisive lever.

The last point, by the way, is often linked to the quality of the platform. As with any platform business, a "the winner takes it all" tendency can be assumed here sooner or later. So the game with higher stakes is on.