With the inflow of major hotel brands in India - does it make business sense to build serviced apartments? This article examines the feeder markets, trends and comparative points to elaborate the Serviced Apartment model.

In the last one year, the price of real estate in India has increased by more than 40% in certain parts of the country. The country's GDP grew at a robust rate of 8.4% during 2005/06 and this level of growth is expected to be sustained in the coming years. The supply of hotel rooms in certain key cities in the country does not and will not meet demand in the short term. These are just the facts. We all know by now that new hotels are required to satiate this demand in the metros and tier II cities, and there is no likelihood of price correction in cities such as New Delhi and Mumbai in the coming two-three years. In India, we do not yet have access to financial spread-betting instruments like the IG Index in the United Kingdom (IG markets is a member of the London Stock Exchange, and both IG Index and IG markets are authorized and regulated by the Financial Services Authority (FSA)) that allow us to limit or expand our exposure to land price risk.

So how may existing players in the Indian hospitality industry – owners, investors and other stakeholders – utilize this period of upswing to their advantage? Maybe it is time to look at different models for maximizing revenues like Mixed-Use Developments, Condominiums or Serviced Apartments, for example.

In the late 1950s and early 1960s, the extended-stay hotel was introduced along with the all-suite hotel and the budget hotel in the United States of America. While the all-suite hotel and the budget hotel essentially absorbed existing demand, extended-stay hotels actually created new transient lodging demand by attracting long-staying travelers who had previously used residential apartments.

The extended-stay hotel or the serviced apartment is typically designed for the traveler who may have to stay in an area for seven or more consecutive days. The rooms and amenities are oriented toward someone who wants a more residential atmosphere. The guestrooms in an extended-stay hotel have larger living areas and full, eat-in kitchens; some have two separate sleeping areas, a dining room that is distinct and separate from the living area and separate baths. A serviced apartments development is supposed to have the characteristics, and feel, of a home while offering recreational facilities that would exist at most hotels. In fact, according to Trendwatching.com – an Amsterdam-based independent trend agency that uncovers global consumer trends on business travelers – the desire for a more luxurious home away from home has become a popular global trend, which is where serviced apartments step in and offer ‘insperiences' for travelers.

The high occupancies of the initial wave of extended-stay hotel development dramatically heightened interest in this segment, and the number of extended-stay hotel products continued to expand, breaking into sub-segments ranging from economy to first-class. The true depth of the extended-stay segment's demand remains difficult to ascertain, although managers of the lower-rated extended-stay products often find themselves competing with operators of conventional limited-service hotels, while higher rated extended-stay products often compete with all-suite hotels or the high-end category of rooms in luxury hotels. Sometimes, the hotels succeed, as the strong investment in the guestroom offerings present a strong price-value perception for guests. Nevertheless, the operating efficiencies in the design and operating concept diminish as the length of the guest's stay shrinks.

So, what efficiencies does the Serviced Apartments model bring in? Before we examine this, let us take a look at the emergence of extended stay demand in India.

Due to the ongoing expansion of the Indian economy and key regulatory developments, the increasing number of multinationals coming into India has seen a number of professionals entering the cities on account of business for medium to short term. This has resulted in a demand for quality accommodation for longer periods. Companies prefer settling their expatriate staff in extended-stay accommodation like serviced apartments, as they are a cost effective alternative to extended-stay hotel accommodation.

In addition they also work out cheaper than quality unfurnished or furnished accommodation that companies need to provide to their expatriate employees. This concept is already developing and the near future should see a number of such facilities operational. However, the size is quite limited at present, because serviced apartments have only been offered in a few cities of India. Indian cities can be comparable to other major markets around Asia. Major cities such as Los Angeles, Singapore and Bangkok support 3,000-5,000 serviced flats. Secondary cities support several hundred apartments.

Tables 1-1 and 1-2 display the average room sizes and the average number of rooms in cities like Beijing, Bangkok and Philippines vis-à-vis Mumbai.

So who would constitute the potential target-market for serviced apartments? Generally, middle to senior management positions in many international or foreign companies are held by expatriate employees, requiring medium to long-term accommodation. IT and ITeS based companies too generate huge demand for serviced apartments. Those companies in the formation stage would usually have their trainers being flown in for the initial set up of their operations and training of their staff and the duration of their visit could range from three months to two years.

We are also witnessing a surge of single woman travelers to the Indian sub-continent traveling for business and this could form a strong target-market for serviced apartments. Management and Consulting companies, including accountancy and legal firms, bring in employees from other offices on temporary assignments. Embassies and Foreign Trade Commissions tend to generate demand for serviced apartment accommodation as the consular and other senior members of staff may require medium to long-term accommodation. Training seminars requiring participation from employees from other parts of the world also generate demand. It is also an important consideration for companies attempting to reduce operative overhead costs by bringing in expatriates for short-term employment or on a project-to-project basis.

The profile of serviced apartments' occupants would typically include executives of foreign banks to multinational corporations providing accommodation at different levels in the company hierarchy: from entry level executives who are typically provided with shared accommodation, to senior management who are provided with furnished quality custom-designed housing to suit their needs. However, due to the lack of quality supply of serviced apartments in India, the current profile is primarily the upper middle management. Hence, apart from the rise in demand that is foreseeable in the near future for this category of accommodation, there is also a catchment of latent demand that can be tapped quite effectively.

According to the guidelines laid down by the Department of Tourism, serviced apartments are categorized into four segments – Three-star, Four-star, Five-star and Five-star Deluxe. However, given the small presence of serviced apartments in India, and the virtual absence of branded extended stay accommodation, it is difficult to classify the existing products into these categories. Most large and small cities in India have a proliferation of guesthouses of all types, many of which have fashioned themselves into serviced apartments. A typical guesthouse could range anywhere between Rs900 to Rs2,400 per day as against standard hotel tariff of Rs1,200 to Rs6,000 per day. The random manner in which existing extended stay products have developed in India has made it quite impossible to define the correct average rates and occupancy levels for market area analysis. Unlike Singapore, where a minimum seven-day requirement is mandatory for a product to be classified as a serviced apartment, the rule of length of stay is non-existent in India, and it is possible to stay in many serviced apartments on a daily basis.

With demand strongly emerging for an improved product, this may be an optimum time and opportunity to enter the extended stay segment in India, and fill in the void for quality branded accommodation. Currently, serviced apartments are coming up in secondary cities like Gurgaon and Noida in the National Capital Region (NCR) due to availability of large land parcels and the active demand from multinationals, some of which have relocated their corporate base outside New Delhi. Along with Gurgaon and Noida, Bangalore and Hyderabad have served as major markets for serviced apartments. These cities have also seen a few independent, unbranded serviced apartment players active.

Since serviced apartments cater for a specific segment, their planning in terms of facilities, spatial requirements and overall ambience reflects the needs of this segment. There are a number of support facilities such as guest lounge, swimming pool, health club, restaurant, business center and other facilities that play an important role in marketing this concept to the potential client.

Compared to hotels, serviced apartments are sometimes a more attractive and lucrative investment due to their lower fixed costs, greater reliance on variable costs and higher levels of efficiency and thus profitability, resulting in a higher cash flow. One of the main advantages of operating serviced apartments is the level of efficiency and high profit margins achievable; this is characterized by the relationship between fixed and variable costs of operation, with fixed costs being maintained at low levels. Average payroll and related expenses for luxury hotels lies in the region of 20% to 25% of total revenue. This is usually lower for serviced apartments, ranging 15% to 20%. Generally, serviced apartments' operations tend to be less labor intensive compared to hotels, hence serviced apartments tend to employ fewer administrative and expatriate staff. This reduces the payroll cost, often resulting in lower Administrative and General expenses. Owing to a lower turnover of guests, Property Operations and Maintenance expenses, too, as a percentage of total revenue is lower for serviced apartments compared to hotels. For the same reason, serviced apartments' operators are also likely to spend less on Marketing & Sales than hotels.

Due to the nature of the product, fixed costs of operating a serviced apartment are relatively low and variable costs increase and decrease in line with usage of the facility. Owing to fixed costs remaining low, efficiency levels improve and any increase in revenue is readily converted to profit.

In today's scenario of a well-performing Indian economy, good growth in the corporate sector, and a more evolved and discerning base of customers, serviced apartments are certainly a good way to go. This would, however, require a detailed demand-supply analysis to correctly identify the right market opportunity, gauge the needs and expectations of the target client base, and develop the appropriate product mix to maximize revenue-earning potential. Maintaining quality and standards in also essential for a successful operation, pointing to the need for affiliation with a well-recognised brand. Many developers are already on this road, and others are getting ready to follow. It will be interesting to see how this segment of the hospitality industry develops, and we expect to see a fair bit of action, and evolution, in this area in the forthcoming future.

Premal, Consulting & Valuation Analyst, joined HVS International, New Delhi in March 2005. Formerly, he worked as Front Office Manager with The Taj Group of Hotels, Resorts & Palaces at Jaipur and Palace Services Manager at Udaipur. Prior to that, he worked in Mumbai at the Taj Corporate Office and was extensively involved with Finance and Quality functions respectively.

He has conducted feasibility and market studies and performed hotel valuations for major hotel clients.

Premal holds an MMS degree with specialization in advanced financial management and a Bachelors degree in economics and financial accounting from Bombay University. www.hvs.com