A viable alternative: Serviced apartments are showing strong demand

Supported by increasing tourist arrivals and the opening of several branded hotel chains, Dubai’s serviced apartment segment is poised for solid growth. The depth of demand for serviced apartments – so-called because a hotel operator provides services such as house cleaning, bed-making and Wi-Fi internet access – is closely connected to the overall fortunes of the emirate’s resurgent hospitality segment.

An Opportunity

For individual investors, serviced apartments provide a unique opportunity to enter Dubai’s hospitality market at the recovery stage of what may be an unprecedented growth cycle. Investment size could be as low as $250,000-500,000 for a hotel-room unit purchase, with services already deducted as hotel operator expenses. Prices for the 444 serviced apartments for sale by Meydan in the Entisar Tower range from Dh26,910 ($7325) to Dh37,674 ($10,255) per sq metre for units facing the sea.

“Selling individual units in a hotel is a way of offering a smaller investor the opportunity to take part in Dubai's hospitality and tourism growth, but at a more achievable scale, with the added benefit of a contracted hotel operator that has a shared interest in the upkeep of the property,” said Mark Tolner, the chief financial officer of The First Group, a property developer based in Dubai.

Whereas private apartments typically generate rental yields of between 6% and 9%, luxury serviced apartments can produce significantly higher rental yields of as much of 20%, though only at the best-run hotels with large networks and strong brands. “Rents can reach double what you’ll normally get on a long-term lease,” said Ronald Hinchey, UAE director at Cluttons, a property management and consulting company. “It’s a very good investment, simply because hotel occupancy and rates are very high at the moment.”

Revenue in the segment increased 21% to Dh2.8bn ($762.2m) in 2012 over the previous year, and supply grew by 9.8% to 23,069 rooms, according to Dubai Department of Tourism and Commerce Marketing. Traditional hotel rooms, by comparison, saw a 17% revenue gain and a rise in supply of 6.5% to 57,345 rooms.

Certain blocks of serviced apartments have also been made available on terms that offer considerable protection from a market shock or contraction. Emaar, which has sold serviced apartments in hotels around the Burj Khalifa – the tallest building in the world – offers investors the opportunity to pool their rental earnings such that even unoccupied apartments are generating revenue for their owners.

A Source of Funds

 From a developer’s perspective, the sale of serviced apartments to individual buyers provides an alternative means of funding during a period of constrained bank lending. A number of the luxury project launches announced in 2013 employ this model and rely on the sale of serviced apartments as a secondary financing source for construction.

Damac Properties, in collaboration with Viacom’s Paramount Pictures, plans to finance the $1bn, four-tower Damac Towers by Paramount project in part with proceeds from advance sales of 1000 serviced apartments. The first 200 of these units sold within 24 hours of coming to market. The company expects rental yields to be around 50% higher than for conventional apartments. Buyers are required to pay maintenance fees and provide the hotel operator with a share of any profit they make from renting the apartment.

Another slate of serviced apartments was taken to market by Emaar Properties in September 2012. The 542 units available at The Address The BLVD, along with another 900 apartments in a twin-tower development, will add about 1400 serviced apartments to the 1700 already built by Emaar.

The success of recent projects launched by Damac and Emaar underscores the viability of the serviced apartment model as an alternative means of securing financing for developers at a time when construction loans are hard to come by. For as long as the emirate’s hospitality segment continues to expand, the market for serviced apartments is likely to grow along with it.