CB Re Hotels Serviced Apartments Australia 1

Australian Serviced Apartments: The Formation of an Industry
Prepared by CBRE Hotels

May 2010
SERVICED APARTMENTS: THE FORMATION OF AN INDUSTRY

With a quarter of all casual accommodation demand now satisfied by this hybrid commercial/residential asset class, an in depth review of this once maligned and often misunderstood concept exposes an industry that is now an integral part of the traveller accommodation market. In this paper, CBRE explores all aspects of the industry from its meaning to its market position; from its customers requirements to its management structures; from its development to its investment and from its performance to its challenges and opportunities. The highlights of the paper are: The ambiguity of the serviced apartment classification is clarified through a clear definition. The industrys success and longevity based on meeting customers preferences of autonomy and flexibility must supersede the unsustainable developer driven supply led demand. The two clearly different purposes of travel (corporate and leisure) creates two different market concepts, profiles and investments. Operational and development efficiencies, variable management structures and investment securitisation fosters industry growth. Serviced apartments lead the market performance indicators to show a 10% revenue (Revpar) market premium. As with any emergent industry, challenges are there to be overcome and opportunities capitalised upon.
Serviced Apartments
The Formation of an Industry

May 2010
CONTENTS
Serviced Apartment Data Development 2 2 4 8 19 24 27
1 The Emergance of Serviced Apartments in Australia 2 3 4 5 Industry Leaders and key Players DNA of the Serviced Apartment Industry Serviced Apartment Market Fundamentals The Serviced Apartment Investment
6 The Complete Package? Challenges and Opportunities
Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels
SERVICED APARTMENT DATA DEVELOPMENT

CBRE Hotels has developed a series of tools to gather primary data to analyse the serviced apartment industry. The data collection methodologies employed in this paper comprise of the following:
1 THE EMERGENCE OF SERVICED APARTMENTS IN AUSTRALIA

1.1 SERVICED APARTMENTS DEFINED
The maturing of the Australian serviced apartment industry enables an ability to define what constitutes a serviced apartment. Any reference to a serviced apartment within this paper will adhere to the following guidelines. A fresh approach to the definition of Serviced Apartments
Traveller Accommodation Property Database

CBRE Hotels developed a comprehensive database of Australian traveller accommodation properties and businesses utilising various industry sources.
Traveller Accommodation Development Database

CBRE Hotels compiles a database of all major mooted, planned and under construction projects. Data is gathered from various industry sources and the national CBRE Hotels network of operators. The serviced apartment business consists of a professionally managed operation with the main purpose for providing serviced apartment product to the general public from one night to a maximum of one year. A purpose built apartment complex with on-site management compliant to all building standards and planning controls relevant to short-term traveller accommodation. There must be separation of the operation of a serviced apartment business and permanent residences within the same building structure. The serviced apartment product consists of at least a studio apartment containing both sleeping and living areas. Food preparation areas, catering facilities and bathrooms are required in each apartment with self-service laundry facilities provided either in- apartment or within the premises. Daily room servicing must be available although servicing may not necessarily occur daily. Definition checklist: Professionally managed Provide serviced apartment product to the general public Purpose built apartment complex Building compliant with building standards and planning controls Separation of serviced apartment and permanent residences On-site management Minimum of a studio apartment containing sleeping and living areas Food preparation and catering facilities and bathroom facilities with each apartment. Self-service laundry facilities
Serviced Apartment Operators Survey

CBRE Hotels identified and qualitatively surveyed the key serviced apartmentindustryoperators.Thosesurveyedrepresentapproximately 30% of the total serviced apartment stock nationally.
Serviced Apartment Investment Index

CBRE Hotels developed a serviced apartment performance index from published and market derived data. It parallels the Property Council of Australia (PCA) Hotel Valuation Index in methodology and application. Additionally, secondary data from Australian Bureau of Statistics, Investment Property Databank, and Property Council of Australia are used.
Acknowledgement and Recognitions

CBRE acknowledges the input and assistance of Australian Bureau of Statistics (ABS), Horwarth HLT, Rawlinsons, Australian Hoteliers Association (AHA), and the various CEOs and managers of operators and Industry participants in the Serviced Apartment Industry in Australia.
Disclaimer
The information set out in this document has been prepared using information derived from a variety of external sources. CB Richard Ellis does not warrant the accuracy of any of the information and does not accept any legal liability or responsibility for any injury, loss or damage incurred by the use of, or reliance on, or interpretation of the information contained herein.
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Optional daily room servicing Maximum stay of one year
stay consumers for apartment product that provides a more residential feel with larger floor space than traditional traveller accommodation has fuelled significant growth in recent years. Specialisation and maturity in the last 25 years Over the last twenty-five years, new accommodation operators have emerged whilst established management companies have adjusted their focus to embrace the serviced apartment product. The creation of this specialist subset of the lodging industry recognised the distinct product needs that required a re-think of development and business operating structures from traditional hotel models. Today, a collection of firms have grown to form the nucleus of the mature serviced apartment industry in Australia.
1.2 EVOLUTION OF THE SERVICED APARTMENT INDUSTRY

Extended stay origin, 1980s proliferation. Serviced apartment product in Australia initially began in response to growing consumer demand for apartment-style traveller accommodation suitable for extended stays. Throughout the 1980s many of the now dominant developers and operators began. Surging demand from both short and extended
SERVICED APARTMENT EVOLUTIONARY TIMELINE

1970s 1979 1982 1983 Mid-1980s 1988 1990 Mid-1990s 1997 1997 1999 1999 2004 2005 2005 2005 2006 2006-2007 2007 2008 2009 Serviced apartment term first used to describe facilities servicing the corporate relocation market and holiday apartments in Queensland. Mirvac Group formed Hotel division involved in property development and serviced apartment management. Toga Hospitality begins operations. Property developer Stockland builds serviced apartments operated under the Holiday Inn Park Suites Brand. A growing consumer need for home away from home accommodation suitable for extended stay and self-catering. This new product was initially known as all-suite apartments. Quest establishes serviced apartments to cater for extended-stay customers. Oaks Hotels & Resorts was formed. Solid demand growth for serviced apartments drives investment and supply growth, especially by Quest, Mirvac, Accor, Stockland and Toga A major milestone as Australian Bureau of Statistics recognises serviced apartments as a product distinct to other traveller accommodation. ABS data recorded 472 establishments and 20,831 rooms nationally. Stockland create Saville brand to replace Holiday Inn Park Suites. ABS reports a pre-Olympic Games supply burst. Establishments grow to 600 with 30,644 rooms. MFS acquires a 19% stake in Breakfree, a major leisure serviced apartment operator. MFS acquires Peppers and creates Stella Resorts (later to be changed to Stella Hospitality). ABS reports 872 serviced apartment establishments and 45,852 rooms nationally. Oaks Hotels & Resorts lists on the ASX in order to capitalise on opportunities in the serviced apartment market. Sydney-based apartment developer, Meriton, announce entry into serviced apartments as a response to poor residential sales. MFS adds Saville Suites and TCL Apartments comprising 26 properties in total and later adds Sunleisure, Outrigger Resorts Group, S8 Property Trust and Pacific International Mantra born through an amalgamation of Stellas Saville and Pacific International brands. ABS reports 957 serviced apartment establishments and 53,118 rooms nationally. Quest awarded accommodation Brand of the Year at Australia, New Zealand and Pacific Hotel Investment Conference.
2 INDUSTRY LEADERS AND KEY PLAYERS

Specialist operators emerge. The evolution of the Australian serviced apartment industry now includes a proliferation of purpose run, professionally managed serviced apartment specialist operators. Research suggests that these firms continue to run a range of successful business models allowing many to take growth positions in recent years. There are many variances between each firms customer target market, business operations and geographic locations. Below is a brief description of a selection of major operators.
Oaks Hotels & Resorts Limited

An emerging operator across a variety of markets. Oaks Hotels & Resorts are Australian based strata-titled property managers that operate and specialise in serviced apartment and residential apartment property. Having experienced significant growth in recent years the Oaks brand is becoming a major player in both resort and city locations. This growth has spread the brand across Australia and into New Zealand and Dubai. Although properties target all forms of demand segments, Oaks core business includes family leisure and corporate extendedstay. In this sense, each location and property is tailored to meet specific market needs.
Mantra Group (formally known as Stella Hospitality)

Australias largest group by apartments, leisure and corporate based. Mantra Group is the largest operator of serviced apartments in Australia. The entity that is now Mantra Group started life as Stella Hospitality, which was created in 2005 as a vehicle to facilitate the amalgamation of a number of Australian traveller accommodation groups by MFS. Although not entirely development driven, Mantra Group has experienced massive growth in recent years primarily through the acquisition of management rights and marketing agreements. Mantra Groups serviced apartment businesses are owned, leased, managed and/or marketed under Peppers, Mantra and Breakfree brands. The serviced apartment product is most prominent across Mantra Groups network; however, there are also a number of traditional hotel and resort-style properties. Mantra Groups serviced apartment businesses are located in many of Australias premier and boutique tourism destinations most prominently along the Eastern Seaboard.
Accor Hotels
A minor business segment in the worlds largest hospitality operator. European based Accor Hotels is one of the worlds largest traveller accommodation providers representing almost 4,000 properties in 90 countries. Diversifying from hotel and resort-style core product, Accor Hotels has now embraced the serviced apartment industry. This shift has been driven by consumer demand and property owners who have sought this product. However, hotel and resort-style properties still represent the overwhelming majority of the Accor Hotels portfolio both in Australia and across their global network. Accor Hotels serviced apartment operations in Australia are leased, managed or franchised under the Grand Mercure, Mercure and All Seasons brands. These properties are located in mainly suburban and regional leisure destinations and inner city locations that maintain a diverse demand base.
Toga Hospitality
A local private developer and single brand operator. Toga Hospitality is one of the longest-running participants in the Australian serviced apartment industry. Serviced apartments are operated under the Medina brand comprising of many purposebuilt properties that are owned and operated while also utilising a number of other operating structures across their network. Based on the success of the Medina product, Toga Hospitality has recently introduced their serviced apartment product to Europe under the Adina brand with plans for significant expansion. Australian Medina properties are generally four stars situated in inner-city and city suburban locations nationally targeting a mix of corporate and leisure customers.
Quest Serviced Apartments

Australias largest group by properties, corporate based clients, franchise business model. Quest Serviced Apartments is one of the largest and fastest growing serviced apartment operators in Australia. Beginning in Melbourne in the 1980s in response to a specific extended-stay market Quest focus is solely on the corporate extended-stay serviced apartment product. Quest Serviced Apartments long-standing involvement with the evolution of the corporate extended-stay market in Australia and business format franchise places them at the forefront of this niche. With 104 properties across the network, Quest Serviced Apartments have achieved wide geographic spread across their Australian network. Quest Serviced Apartments has also established operations in New Zealand and Fiji.
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Mirvac Hotels & Resorts

A specialist hospitality operator, part of a listed institution with multiple brands across various markets. Mirvac is an Australian based listed, integrated real estate group with core activities including investment and development across many sectors including traveller accommodation. With this dual expertise and long history Mirvac have customised their product for the Australian serviced apartment industry. Mirvac Hotels & Resorts operate serviced apartments in Australia under Quay West, Quay Grand and Sebel brands. These products target a mix of corporate and leisure customers depending on location and include mostly boutique inner city properties and resorts in holiday destinations. Mirvac also count an equally large number of hotel and resort properties in their portfolio across Australia, New Zealand, Pacific Islands and Dubai.
Q Resorts
A small new local Queensland operator. Q Resorts began in 2005 as an operator of serviced apartments within the Brisbane market. Since then the firm has expanded quickly to hold management rights for 10 properties within Brisbane and regional Queensland. The firm has become a regional leader within Queensland while holding national expansion aspirations. Q Resorts target a mixture of inner-city corporate demand and regional leisure tourism, especially the Australian family segment.
StayWell Hospitality Group

A small new local Sydney based operator. In 2006 StayWell Hospitality Group started as an Australian based independent serviced hotel and apartment owner/operator and manager. Since then the firm has achieved high growth through its Park Regis and Leisure Inn brands. Currently operating eight serviced apartment properties, there are plans for accelerated expansion of their Australian and International network in the medium term. Both Park Regis and Leisure Inn properties are located in major cities and regional leisure tourism destinations.
Meriton Serviced Apartments

A default operator that emerged from a Sydney residential developer. Meriton are property developers based in Sydney who entered the serviced apartment industry in April 2003 as an alternative means of utilising apartment product affected by falling residential values. Historically Meriton Serviced Apartments have maintained fluidity of some apartment stock according to investor returns in either residential or traveller accommodation markets. However, recently Meriton Serviced Apartments have deliberately grounded themselves in the serviced apartment industry through purpose built expansion into Queensland and a high profile addition to the Sydney market. Meriton Serviced Apartments target a mixture of corporate and leisure customer segments through a low cost minimised intermediary distribution and promotion strategy.
2.1
BRAND POSITIONING
Each brand is positioned differently according to a number of variables including target market, product and service offering, as shown in Figure 2. Although in reality properties may position at one end of the scale but still receive customers from another segment, the brand positioning matrix intends to present generalised intended positioning. Catering to a broad range of markets.
Figure 2 Serviced Apartment Brand Positioning Matrix
Corporate
Leisure
Luxury
Economy
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2.2 TALLY OF SERVICED APARTMENT OPERATORS

Figure 3 provides a list of major serviced apartment operators and the number of serviced apartment properties and keys they control within Australia. The list has been compiled using the CBRE Hotels Traveller Accommodation Property Database as at August 2009 containing major operators. Properties include all operating structures and only those that provide food preparation and catering facilities.
Figure 3
Major Australian Serviced Apartment Operators Properties Keys Star Rating
Mantra Group Peppers Mantra
92 3 48
9901 469 6703
3 to 5 4 to 5 4 to 4
Breakfree Quest Serviced Apartments Oaks Accor Hotels Grand Mercure Mercure All Seasons Toga Hospitality (Medina) Mirvac
41 104
2729 5438
3 to 4 4 to 4
30 21 16 2 3 23 16
4900 1595 1047 182 366 2031 1786
4 to 4 3 to 4 4 to 5 4 to 4 3 to 4 4 to 4 4 to 5
Quay Grand Quay West Sebel Meriton Serviced Apartments Q Resorts StayWell Group Park Regis Leisure Inn
Source: CBRE Hotels
1 4 10 7
69 438 1172 1429
5 5 4 to 5 4 to 5
10 8 6 2
1046 495 352 143
3 to 4 4 to 4 4 to 4 4
3 DNA OF THE SERVICED APARTMENT INDUSTRY

The serviced apartment industry has been forged from a number of central changes within and affecting traveller accommodation in Australia. The most crucial shift has occurred in consumer demand. This has involved the emergence of a sizable segment of the overall consumer market which seeks a product different to traditional traveller accommodation to satisfy particular needs. From this, the genetic make-up of the modern serviced apartment industry has been found to comprise three main inter-related and mutually dependent components The Customer, The Development and The Business. Customer centric evolution and driver of growth. Figure 4 below symbolises this customer-centric evolution and driver of growth for the serviced apartment industry in Australia. The success of the serviced apartment model has come as a result of the convergence of underlying fundamentals creating synergies across the sum parts of this DNA. Fundamental to this are the changing consumer consumption patterns and expectations, the growth of business travel, the need for tailored and flexible cost accommodation, and shifts in the balance of development feasibility. Success from the convergence of underlying fundamentals.
Figure 4 Serviced Apartment Industry DNA: Major Components and Relationships
3.1
THE CUSTOMER
The core function of traveller accommodation is to satisfy basic human needs for shelter, security and a place to sleep and rest. Beyond these necessities lie the virtually countless points of differentiation and identification of modern traveller accommodation brands. It is within this realm that consumer segments seek to satisfy particular needs and wants. Purpose of travel (Leisure & Corporate) drives variety in the DNA. Broadly split between corporate and leisure, traveller accommodation customers seek a range of product, service, location and cost attributes that vary depending on the purpose of travel. The serviced apartment product was borne from such segmentation, and it is the augmentation of the segment which is driving growth of the industry. The CBRE Hotels Serviced Apartment Operators Survey uncovered various characteristics of the typical customer of Australias major serviced apartment operators. A number of key uniform characteristics can be identified that underpin serviced apartment demand from both corporate and leisure consumer segments. Desire to seek independence to take charge of their purpose of travel. Above all else, the serviced apartment customer is found to seek independence to take charge of their holiday or business trip. This independence allows the customer autonomy and flexibility which personifies the essence of the serviced apartment product.
Accommodation Product
Features of the product empowers control of the customer accommodation experience. The serviced apartment product provides the flexibility sought by customers through the provision of in-room cooking, washing, working and living space that is typically not offered in other forms of traveller accommodation. Ostensibly the modern serviced apartment comprises of a typical residential apartment with varying degrees of service provisions depending on particular operators.
The Business
The Customer
The Development
Minimisation of food and beverage, a departure from traditional hotel accommodation.
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Research found many operators offer limited on site food and beverage provision, fitting perfectly the preferred flexibility and control mindset of the customer. The added benefit to the operator is a reduction of operating exposure to this marginal revenue stream. This is a significant shift away from traditional full-service hotels and is in keeping with the evolution of a portion of the modern Australian consumer who is informed, independent and empowered towards this specialised product.
Figure 5 Serviced Apartment Customer Profiles Corporate Leisure
Productattributes Home away from
Home away from
Property Location
Convenience and ease of access are important rather than critical. Locational needs of the serviced apartment guest are not as demanding as those of traditional hotels. A convenient location central to desired attractions or places of work is important. However, the serviced apartment consumer, especially the business portion of the segment, is not necessarily concerned with a prime property location. Convenience and ease of access are important, however, are not critical to their purchasing decision. Around the corner or half a block away satisfies. This is significant to the financial feasibility of development for serviced apartments, especially in major cities, due to the shortage and high cost of prime development land.
Living and relaxing Self-catering and other self-service domestic services Work space Leisure and relaxing space Access to attractions
Location
Convenience to business locales
Other needs
Private vehicle access Flexible cost/ balance between convenience and cost control Independence Information: attractions, food and beverage, other services Independent access to Leisure facilities
Operating Cost
Flexible Cost Travel matches customers needs for flexibility and customisation.
Source: CBRE
Over the last decade flexible cost travel has been firmly entrenched in the psyche of consumers in Australia and around the world. Airline, vehicle hire and other travel centric tourism businesses have developed successful tailored product and service offerings to match the consumers growing need for flexibility and customisation. Serviced apartments, with a lower cost base and less restrictive brand standards relative to many fullservice hotels, are able to tailor service provision to best suit each property according to guest segmentation. In Figure 5, key serviced apartment consumer requirements are provided. This simplification does not represent full consumer profiling but rather a generalised summary. To better understand the operating cost equation, CBRE has interpolated data released by Horwarth HLT in their Key Market Reports 2009. These figures are purely for comparison and do not represent any actual hotel or serviced apartment. In preparing this analysis CBRE has also enlisted the assistance of Rawlinsons quantity surveyors to independently determine the number and size of rooms/apartments.
Operating performance favours Serviced Apartments over Hotels. Figure 6 shows the serviced apartment model produces significant cost benefits with Gross Profits of 64.5% compared to hotels 54.3%. Costs savings continue through undistributed operating expenses with serviced apartments producing Income before Management Fees and Fixed Costs of 50.1% compared to hotels at 36.3%. The cost of management is typically higher in serviced apartments closing the gap between hotels and serviced apartments based on Income before Fixed Costs to 45.7% for serviced apartments and 34.1% for hotels.
Figure 6 SAMPLE HOTEL AND SERVICED APARTMENT INCOME AND EXPENDITURE PROFILE Hotels Serviced Apartments
Average Size of Property (Rooms) Average Occupancy Average Daily Rate Revenue Per Available Room DEPARTMENTAL REVENUE Rooms Food & Beverage Telecommunications Other Operating Departments Rentals & Other Income (Net) Total Departmental Revenues DEPARTMENTAL EXPENSES Rooms Reservations Food & Beverage Telecommunications Other Operating Departments Total Departmental Expenses Gross Operating Income UNDISTRIBUTED OPERATING EXPENSES Administration & General Marketing Utility Costs Property Operation & Maintenance Total Undistributed Expenses Income before Mgt Fees & Fixed Costs Management Fees (base + Inc.) Income Before Fixed Costs
148 78% 175 136.5 $ 7,373,730 3,417,172 65,860 333,000 153,476 11,343,238 2,027,628 200,283 2,682,648 78,144 200,392 5,189,095 6,154,143 782,109 516,038 269,469 465,513 2,033,129 4,121,014 253,661 3,867,353 % 65.0% 30.1% 0.6% 2.9% 1.4% 100.0% 27.5% 2.7% 78.5% 118.7% 60.2% 45.7% 54.3% 6.9% 4.5% 2.4% 4.1% 17.9% 36.3% 2.2% 34.1%
149 76% 176 133.76 $ 7,274,538 954,941 122,925 160,622 235,420 8,748,446 1,976,835 86,346 858,091 81,056 99,979 3,102,307 5,646,139 606,544 299,539 148,127 207,408 1,261,617 4,384,522 384,353 4,000,169 % 83.2% 10.9% 1.4% 1.8% 2.7% 100.0% 27.2% 1.2% 89.9% 65.9% 62.2% 35.5% 64.5% 6.9% 3.4% 1.7% 2.4% 14.4% 50.1% 4.4% 45.7%
Figures extracted from Key Market Reports 2009 for Serviced Apartments and Hotel Industry Survey of Operations 2009. NB: Figures contained in this analysis have been extrapolated form the Horwarth reports by applying revenue and operating expenseratios to the build size and room quantities established in the Rawlinsons analysis.
Source: CBRE, Horwarth HTL, Rawlinsons
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Customer Mix
The CBRE Hotels Serviced Apartment Operators Survey, provided insight into the make up of the customer at an industry-wide level. Understanding the prevalence of domestic and international, corporate and leisure customers provides an indication of the strengths and opportunities operators have created. The Survey also highlighted some limitations of the serviced apartment product as well as current promotion and distribution practices. Understanding the business mix and their requirements. Research found that domestic customers make up 82% of serviced apartment business with international customers just 18%, as shown in Figure 7.
Figure 7 Service Apartment Domestic/International Customer Mix of Major Australian Serviced Apartment Operators
Opportunity to build through developing International markets. This provides significant opportunity for Australian operators to drive growth in their local businesses by targeting new or underrepresented international markets. The mix varies by location and operator focus. The mix of domestic and international customers has been found to vary between CBD, regional and leisure locations as shown in Figure 8. Research suggests that CBDs of major cities have a greater share of international customers which may be due to cities providing greater ease of self-sufficiency and familiarity compared to regional locations.
Figure 8 Customer Segmentation & Geographic Prevalence for Major Australian Serviced Apartment Operators Domestic International
CBD Location 18 % Domestic International Leisure Location 82 %

Source: CBRE Hotels
75% 90% 80%
25% 10% 20%
Regional/Suburban Location
Leisure customers have historically dominated demand. The Survey found serviced apartments to be used by both leisure and corporate customers although mix varies greatly by geographic location. While regional holiday destinations report a vast proportion of leisure customers, major regional, metropolitan and CBD locations generally attract a majority of corporate customers mixed with a smaller proportion of leisure customers. In overall terms Figure 9 indicates a majority of two thirds towards leisure customers. This is primarily due to the large number of serviced apartment properties in regional holiday destinations. It is worth noting that the majority of new build developments have been focussed to the corporate sector.
Source: CBRE Hotels
Domestic consumers comfortable with self sufficiency, international less so and lack knowledge of the opportunity. The idea of self-sufficiency and independence easily suits domestic customers who understand their surroundings. Conversely, international visitors were reported to require increased services and had less requirement for expansive in room cooking and cleaning facilities, due to their limited knowledge of the environment, and reliance on the accommodation provider or third party. Additionally, many international markets are still coming to grips with the serviced apartment product and of Australian serviced apartment operators. The experience of Toga in Europe with their Adina brand suggests it may well only be a matter of time before the concept is better understood and, by their account, becomes a popular option for international travellers.
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Figure 9 Leisure/Corporate Customer Mix of Major Australian Serviced Apartment Operators
Regional or local level data: Local economic development including infrastructure, government, commercial and other evidence of economic growth; National and International Visitors Surveys; Leisure Corporate Public and private transport access; Airport performance data;
37 %
63 %
Accessibility of property in relation to key attractions/locations relative to target market Invariably each Serviced Apartment provider has developed their own matrix to base their decisions on. Without exception the major operators have cultivated relationships with key customers and rely heavily on the movements and trends of these customers to determine where, when and how large new projects will be. The most successful Serviced Apartment providers have made customer demand a priority in their business operations. The 2009 prize for Brand of the Year Awarded to Quest Serviced Apartments at the Australia, New Zealand, and Pacific Hotel Investment Conference, recognised among other accomplishments the significant growth achieved by Quest out performing other hospitality groups in the region.
Source: CBRE Hotels
Demand Benchmarking
Quantifying and defining demand for forecasting and feasibility. Demand needs to be quantifiably defined for the purpose of forecasting and assessing development feasibility. Understanding the origin, purpose of travel and needs of the modern serviced apartment customer presents an opportunity to define demand. There are an almost limitless number of potential economic, demographic, infrastructural and political elements to serviced apartment demand. Research found that major serviced apartment operators use significantly varied benchmarks to underlie the development of new supply. Serviced apartments demand can be tracked and forecasted through a number of benchmark indices including: National level data: General economic indices for development market and potential inbound markets including Gross Domestic Product, Gross State Product, foreign exchange rates, Australian interest rates, unemployment rates and retail spending; Domestic business and consumer confidence indices; National and International Visitors Surveys;
3.2
THE DEVELOPMENT
Serviced apartments have bridged the feasibility divide. At a time when it is widely accepted that new build hotels in one line are extremely difficult if not impossible to economically support, the emergence of the serviced apartment has seemingly bridged the feasibility divide. According to the CBRE Hotels Traveller Accommodation Development Database, 75% of new projects currently planned or under construction are serviced apartments. Distinct characteristics of this product have required a re-think of operating systems to produce a financially feasible operating model. Confluence of forces creates supply opportunity - Developer and operator union. - Strata titled investment and financing.
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The nature of apartment style self-contained accommodation, which requires larger floor space and the limited use of nonroom revenue generating facilities, has required a union between developers and operators. The use of strata-titling for serviced apartment developments enables financing through the yield arbitrage offered by small investors further adding to the feasibility formula. The key elements of this feasibility and the ways in which the serviced apartment product evolved to meet todays investment environment are analysed below.
Figure 10 Construction Cost Analysis Hotels Serviced Apartments
Total Building Area M2 Average Room Size M2 Number of Rooms/Apartments Total Net Building Area M2 Building Efficiency Ratio* Construction Cost (Building only) Building Cost/ M2
10,000 32 148
10,000 40 149
Construction cost
Consumer need for apartment-style product with flexible cost and reduced services has many ramifications for the development of serviced apartments. Research has found that serviced apartment developments are able to achieve greater efficiencies. Limiting non-productive low profit components drives development efficiency. Traditionally, brand standards for full service hotels require many low revenue generating guest services and public spaces, including grand lobbies and elaborate food and beverage outlets. Without these inclusions, serviced apartment construction costs can be focused more concertedly toward the apartments. Furthermore, the self-contained nature of serviced apartment product becomes a self-fulfilling prophecy enabling a reduction in food and beverage offering requirements, back of house service areas, further reducing the need for other public spaces such as lounge areas. This allows development costs to be focussed on apartments more directly related to sales return. CBRE has enlisted the assistance of Rawlinsons quantity surveyors in analysing this comparison. Rawlinsons Publications release an annual handbook of general construction costs for Australia. The basis of this comparison is the notional construction of two very similar sized buildings of 10,000 m2 each. Both purpose built as either serviced apartments or hotel. In this study Rawlinsons has determined the likely number of rooms or apartments in each structure and the average room size based on their independent analysis. Costs are based on their published average build rates as published in the 2009 Rawlinsons Australian Construction Handbook. The comparison is set down in Figure 10 below. An additional layer of analysis of building efficiency compares the relationship of rooms / apartment area to the overall building area shows 60% for Serviced Apartments and only 47% for hotels.
4,736 47% $46,213,00
5,960 60% $27,380,00
$4,621
$2,738
* Building Efficiency Ratio calculated by multiplying number of rooms/ apartments by average size then dividing by total building area. Source: Rawlinsons
Availability and land values

The barrier to entry for other development types less evident for serviced apartments. The availability and cost of land suitable for traveller accommodation development has been a major factor disrupting the feasibility of hotel development especially in central business districts of many of Australias major cities in recent years. Room price elasticity and high operating costs produced an uncompetitive land relationship to other land uses throughout the recent boom period. There are two key aspects of serviced apartment developments with limited facilities which go a long way to alleviate these issues. Firstly - The limited service model, particularly for corporate product, has been found to not require a prime location. Such locations are found to have greater availability and are more affordable. Secondly Experienced developers report that feasibility is less scale dependent. Operational breakeven and development viability is achieved with a comparatively smaller project.
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Financing development
Strata presales spawned funding. There has been support from financial institutions and investors who recognise and acknowledge the inherent alternate use in many serviced apartment product as residential units. Whilst this ability to offer an alternate exit strategy has provided a layer of comfort to funders, levels of pre sales commitment and sound business plans are all essential to funding proposals. Business case support now a prerequisite. Funders have generally mentioned the following as important considerations: Experience of developer in serviced apartment sector. Link to an experienced and proven serviced apartment operator. Clearly rationalised feasibility study explaining the business plan behind the serviced apartment business, its location and the size / scale of the development. The ability to strata title and sell to individual investors. Qualifying projects generally have a minimum unit size and presales threshold. These tend to be tied to residential models for alternate exit if needed. A commitment to either a bank take out at the end of the development stage or a pre-requisite level of presales commitment.
represented. This interest is likely to intensify as the level of professionalism and the financial stability of successful operating companies becomes evident. As with any investment, there are potential up-sides and risks involved with serviced apartment investments. Generalised characteristics of the serviced apartment investment are outlined in Figure 11.
Figure 11 Serviced Apartment Investment Characteristics Effect Private Institution
Up-side
Low price point entry Multiple exit level strategies Opportunity for Strong returns from individual use of an growth asset class apartment or loyalty program Multiple exit strategies Income smoothing for balanced diversified portfolio Lack of experience with serviced apartments Lack of Income security (exposed to income risk) in some operating/ ownershipstructures
Down-side
Potential for body corporate log-jam
The Investor
Small investors dominate the asset class through strata acquisition.
Source: CBRE Hotels
Potential underperformance when compared to pre opening expectations
Strata-titling has exposed traveller accommodation investment to a broad market by offering a low price entry point for private investors. As the industry has matured, so has investors knowledge and understanding of the serviced apartment asset class. Major Operators report that habitual private investors are actively seeking this type of investment over and above alternative opportunities. Institutional market relatively unrepresented. The maturing and growing sophistication of serviced apartment investments are likely to become increasingly attractive to institutional investors despite currently being relatively under-
3.3
THE BUSINESS
Business mix largely determines operating structure and methodologies along with operators core competencies. The business of the serviced apartments, including promotion and distribution channels and operating structure, can vary significantly between organisations depending to a large extent on whether the business is primarily targeting leisure or corporate customers. Other business structure determining variables include property location, target markets, specifics of the on-site service offering, and the core competencies of the owner(s) and operator organisation.
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Business activity focussed on the major profit centre accommodation. The relative absence of non-core revenue centres such as food and beverage and recreational facilities in some serviced apartments enables operators greater focus on the promotion of the profit driver, accommodation. Where these non-core revenue departments are included, the businesses tend to perform very close to traditional hotel product.
Serviced apartments have historically attained higher room rates than traditional traveller accommodation. ABS data (figure 26) shows serviced apartments have consistently achieved ADR around four percent and RevPAR around 8 percent above the average of other traveller accommodation nationally. This is due to typically larger floor plans and a higher proportion of newer product. Mix of demand pricing for leisure and negotiated corporate pricing applies. The pricing strategy is closely aligned to the target market. The leisure provider is well versed and business dependant on seasonal dynamic pricing whereas, the corporate provider has preferred negotiated contract pricing with associated brand loyalty.
Primary Business Drivers

The primary drivers and main elements that shape key operations and functions of the serviced apartment business are consumer demand, the potential for a low cost base, and flexible brand standards. Consumer demand. Growth in the demand for apartment style traveller accommodation underlies many business functions. Low cost base. The possibility of scaled down service provisions, including limited on-site leisure facilities and room servicing, have acted to reduce bottom line costs and therefore enable greater flexibility in room rates and improved marginal returns as shown in Section 4.1.3. The propensity for a longer length of stay puts further downward pressure on costs as it enables many serviced apartment business to factor in fewer full services on average annually. In many instances, a limited service offering has enabled greater benefits from outsourcing in process such as laundry, facilities maintenance, and housekeeping. Flexible brand standards. All of this is possible thanks to the nature of brand standards for most of Australias major serviced apartment operators. These operators enable flexibility to create a product offering, provision of service and business operation depending on site-specific contingencies including location, size, target market, and local environmental surrounds.
Brand standards
Flexible standards based on consumer targeting within a minimum service framework leads to profitability strength. Brand standards in serviced apartments are minimum service, product and marketing requirements that many operators set as base necessities before a property can carry their name. Australian serviced apartments include modest lobbies and are mostly devoid of significant food and beverage outlets. Many operators reported the ability to flexibly apply finishes and fixtures to each property depending on specific peculiarities in consumer targeting and competitive forces. Similarly when it comes to operating models, operators have taken pragmatic measures focused on a balance between customer service and return to investors with an emphasis on efficiency and cost control. Such flexibility strengthens profitability by assisting cost control relative to achievable targeted room rates.
Room servicing
Customer determined servicing preferences creates cost efficiencies. The extended stay nature of serviced apartments can reduce the required frequency of apartment servicing. The CBRE Hotels Serviced Apartment Operators Survey found that most operators provide full apartment servicing once per customer stay or once a week for extended stay customers. This is often combined with cost effective daily refresh service. Certain operators offer additional full services as an optional extra charge. Restricted servicing results in significant cost reduction as full servicing can represent around 25% to 30% of average daily rates (ADR). Notwithstanding the operators comments, this assertion is not reflected in the Horwarth performance data.
Distinct Operational Attributes Room rates & pricing

Strong relative revenue performance from product size and youth.
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Marketing and distribution

Direct marketing and distribution applying technology predominates over traditional sources and channels. Methods of communicating and selling serviced apartments to the modern consumer have mostly evolved in line with technological advances. In many respects the process and channels used are similar to any fully service hotel. Research suggests that serviced apartments favour and make particular use of direct distribution such as direct website and call centre booking and personal selling. The process promotes customer loyalty and keeps operators abreast of changing demands, whilst also eliminating intermediary distribution costs. An in-house sales force is seen by all of the major operators as an effective and efficient means of targeting customers. Conversely, many acknowledge that distribution through other more traditional channels such as travel agents and tour wholesalers whilst important is diminishing. Consumer control on booking. Domestic consumer markets have been found to be especially knowledgeable about serviced apartment product aiding a propensity for do-it-yourself travel bookings. Accordingly, a number of firms report a combination of direct booking and internet intermediaries as their dominant distribution strategy. The Horwarth survey shows sales and marketing to represent 4.5% of gross revenue on average for hotels and only 3.4% for serviced apartments.
Type depends on preferences of developer/owner and operator competencies.

Figure 12 Operating Structures Used In Serviced Apartment Businesses of Major Australian Operations
Franchise Owner/Operator Management Agreement Lease
Source: CBRE Hotels
Management Agreement
Active involvement in the property/business by all participants under Management Agreements. Management Agreements, as the name suggests, are agreements where the property owner contracts to a third party to manage the premises on their behalf. Technically, ownership of the business is retained by the property owner or property management company (PMC) with the holder of management rights receiving a fee for services made up of a percentage of revenue and/or operating profit. Through this, elements of risk are shared between operator, PMC and owner. Under management agreements, the PMC takes the pivotal position as controller of the Management Rights and under certain circumstances may also become an investor in the real estate and merge the value of the rights with the real estate to form a very influential interest in the project. From an operators perspective, management agreements are used by a number of major Australian serviced apartment companies to fast-track expansion and quickly build critical mass of brand exposure.
Business Operating Structures

A variety of business operating structures are employed. Operating structures come under the umbrella terms of management rights, lease, owner/operator and franchise. There is no one-size fits all with the most suitable mechanism depending on various contingencies and factors including financial and legal structures, preferences of property developer/owner and the competencies of operators. CBRE Hotels research has found most major operators employ multiple structures across their portfolio with each different structure suiting certain business requirements and property owner preference. Operating structures also vary at different points of the overall framework, whether at the property or business level. Figure 12 highlights the use of franchise and management rights as the most commonly used operating structures at the business level.
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Lease
Lease allows clear segregation of roles, responsibilities and risks. A typical commercial lease forms the primary link between property owners and PMC, or the operator when PMC is not the operator. Under this arrangement the property owner has no direct involvement in the business and receives a return on investment by way of rent. The PMC or operator pays the rent and subsequently bares the majority of risk associated with operational performance. For property owners, by fixing income, the impact of cyclical fluctuations is limited and therefore risk is minimised. Strength of tenant covenants, length of lease and confidence in the PMC or operator all play an integral part in assessing the value of these agreements.
Similar to a franchise in many ways, Marketing Service Agreements, or MSAs, are a popular method of promoting and distributing serviced apartments to consumers. This involves a leasee or owner/operator contracting this service to a specialist brand. As an outsourced marketing function, and not a property or operational aspect of the business, MSAs have been excluded from this discussion on business operating structures as they generally do not provide business operation systems.
Owner/operator
The simplest model that requires a broad skill set. This strategy combines ownership of property with ownership of the business. All of the business and investment risk and return is the owners. For the serviced apartment industry, this would require the owner to also have suitable skills and expertise to perform the business in a professional manner. In its simplest form this structure would limit the unlocking of capital enhancement through strata lot and management rights sale. Notwithstanding this limitation, opportunity is available for operating structures and legal interests to be created to unlock this value enhancement when appropriate.
Franchise
Franchising allows business systems and/or marketing expertise to be employed by owners and/or lessees. A franchise is where a company (franchisor) has developed business procedures, trademarks and standards and contracts with a third party (franchisee) to use this business intelligence under prescribed controls. In the Serviced Apartment setting the franchisee either: Takes the place of the operator in the lease scenario set out above or Merely provides marketing services through a marketing franchise (via a Marketing Services Agreement) on behalf of the lessee or PMC. These variations create quite different obligations and responsibilities to the asset owner. One of the main benefits of the former scenario is that the franchisee owns their business and is therefore personally invested in its success. In the latter, the marketing service offered by the franchisor enhances the lessees or PMCs performance but does not subrogate their responsibilities to the owner. The franchise business structure allows the specialisation of key tasks and functions. Franchisees are often selected on operational management skills leaving the franchisor to focus on key strategic and shared services such as promotion, distribution, procurement, development and strategic planning.
Business Operating Frameworks

Multiple frameworks can be employed that require a detailed understanding of various party arrangements, responsibilities, risks and documentation. The simplest structure is where the lessee or management company provides business services on behalf of the investor as depicted in Figure 13. This direct link is uncommon due to feasibility constraints and is found where the property asset is held in one line (Figure 14). Strata titling of serviced apartments has necessitated an involved legal relationship between property and business operator. The property management company (PMC) acts on behalf of multiple property owners by creating this link. The diagram below shows typical strata-titled serviced apartment business structure options and relationships.
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Figure 13
Figure 15 Operating Structures Used In Serviced Apartment Businesses of Major Australian Operations Guest
Owner/Operator Management Agreement Lease
Franchise/Operating Company
Leasee/Management company
Investors
Investors
Investors
Figure 14
Source: CBRE Hotels
Guest
Leasee/Management company
Investor
Risk is apportioned throughout the chain of relationships depending on the type of structural agreement in place. Lease predominates as the most common owner operator relationship by the major operator groups. Figure 15 indicates the high percentage of leases used at the property level of the typical serviced apartment framework for the operators surveyed, however, given the proliferation of smaller operators in the wider market where management/letting agreements predominate, the balance across the whole market may differ.
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4 SERVICED APARTMENT MARKET FUNDAMENTALS

4.1 GROWTH DRIVEN BY FUNDAMENTAL STRENGTH
The size of the sector now demands seperate analysis. The distinctiveness of serviced apartments to other forms of accommodation allows specific analysis of the industry as a subset of traveller accommodation. Further analysis of the serviced apartment industry reveals its dominance over the last decade showing serviced apartments to be a significant driving force for traveller accommodation in general. The Australian traveller accommodation sector includes an array of accommodation types broadly including hotels, motels, resorts, guesthouses, bed and breakfast, backpacker and serviced apartments. To fully understand where and how serviced apartments fit Tourist Accommodation Small Area Data from Australian Bureau of Statistics (ABS) provides a macro view of the sector. Serviced Apartments have been the main driving force behind traveller accommodation demand growth over the last decade. Over the last decade traveller accommodation has grown nationally. According to ABS, the Australian traveller accommodation sector numbers 4,277 star graded establishments with a total of 223,319 rooms as of December 2008. Of the total, serviced apartments represent 957 establishments contributing 53,118 rooms. Figure 16 shows the growth in establishments and rooms stock for serviced apartments and the rest of the sector suggesting serviced apartments to be the main driving-force behind supply growth in recent years.
Figure 16
Rooms
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 16
Rooms
180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Australian Traveller Accommodation Supply (excluding Serviced Apartments)
Est.
4,000 3,800 3,600 3,400 3,200 3,000 2,800
Other Rooms
Source: CBRE Hotels & ABS
Other Est.
Source: ABS
National Growth and Market Share

Demand growth has been steady and strong. Market conditions throughout much of the last decade were conducive to demand, supply and room rate growth. During this period the Australian traveller accommodation sector saw generally buoyant trading conditions until growth softened with a Global Financial Crisis (GFC) induced economic slowdown in the second half of 2008. Accommodation supply and demand have grown consistently over the last decade coupled with solid room rate (ADR) and revenue per available room (RevPAR) annual growth rates. Data highlighted in Figure 17 indicates that this growth has been led by the serviced apartment demand. With stronger demand than other sectors, Serviced Apartments attract 25% of market demand.
Figure 17
Traveller Accommodation Demand (Room Nights Sold)
Australian Serviced Apartment Supply
Est.
1,200 1,000 800 600 400 200 -
Other
50,000,000 48,000,000 46,000,000 44,000,000 42,000,000 40,000,000 38,000,000 36,000,000 34,000,000 32,000,000 30,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Other
SA 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 -
Serviced Apartments (SA)
SA Rooms
SA Est.
Source: ABS
19
A comparison of demand for serviced apartments and for other travelleraccommodation highlights extraordinary growth in number and confirms the growing prominence of serviced apartments through market share. Figure 18 shows consistent year-on-year serviced apartment demand growth while the rest of the sector experienced sluggish growth and even declines in 2001 and 2008. Large serviced apartment percentage increases are partly indicative of the low base from which demand has grown from. For example the largest increase in actual room nights occupied during the period was in 2008, with over 1.4 Million extra serviced apartment room nights sold over the previous year.
Figure 18
Comparative Demand & Market Share Growth
14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 0% 20% 15% 10% 5%
Figure 19
Traveller Accommodation Supply (Room Nights Available)
Other 75,000,000 73,000,000 71,000,000 69,000,000 67,000,000 65,000,000 63,000,000 61,000,000 59,000,000 57,000,000 55,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Other
SA 25,000,000 23,000,000 21,000,000 19,000,000 17,000,000 15,000,000 13,000,000 11,000,000 9,000,000 7,000,000 5,000,000
Serviced Apartments (SA)
SA Share
25%
Source: ABS
The exceptional growth of serviced apartments nationally is highlighted by comparative percentage change. Through consistent year-on-year growth, serviced apartments are increasingly representing a larger proportion of all traveller accommodation rooms stock.
Figure 20
Comparative Supply Growth of Australian Serviced Apartments
16% 14% 12%
Serviced Apartment
Other
SA Share
Source: ABS
SA Share
25% 20% 15% 10% 5% 0%
Demand strength and feasibility support led to of accommodation market supply being contributed by Serviced Apartments. Developers and investors have recognised these strong characteristics. Demand growth and a favourable feasibility equation have combined to drive supply growth over the last decade. Actual supply, quantified as room nights available, is shown in Figure 19. From this, serviced apartments are shown to represent on average just under seventy percent of all new traveller accommodation supply to enter the market over the last decade. This is especially significant as serviced apartments, by the end of 2008, represent almost 24% market share of the total current supply.
10% 8% 6% 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008
Serviced Apartment
Other
SA Share
Source:ABS
A near perfect storm in market fundamentals drove growth. Serviced apartments have grown to be favoured by developers as a number of factors merged to create a generally profitable and risk reduced development. To underline this point, 2002 saw a reduction in overall traveller accommodation stock nationally as oversupply in the major market, Sydney, was met with the withdrawal of a number of properties while serviced apartment supply grew over 7%.
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Figure 21
New Supply Market Share
3000000 2500000 2000000 1500000 1000000 500000 0 2000 2001 2002 2003 2004 2005 2006 Other 2007 2008
Servi ced Apa rtment
Queensland, thanks mainly to regional leisure tourism, represents the highest proportion of demand for serviced apartment room nights. Growth has continued despite the removal of older uncompetitive product into the residential market. Meanwhile, a number of other states have seen conversion of inner city serviced apartments to permanent residential properties as owners sought inflated returns available during the residential property boom. This occurred in Western Australia between 2006 and 2008 as residential apartment values squeezed some serviced apartments out of the market. The fast transfer of stock demonstrates the investment flexibility provided by strata-titled apartments. With market-wide occupancy levels running at near 80%, the withdrawal of supply impacts room nights sold.
Figure 22
RNS 5,000,000 4,500,000
Source: ABS
Supply growth flattened by the GFC. It is expected that serviced apartments will represent an increasing proportion of future traveller accommodation development. The investment climate has altered since mid-2008 because of the GFC inspired changes, local lending criteria and subsequent difficulty in securing finance.
Serviced Apartment Demand by State

NSW VIC QLD SA WA
4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
State Growth and Market Share

The matching of demand growth to supply supports the position of unsatisfied demand. Demand and supply trends have varied across different states in line with circumstantial market fundamentals. According to the nuances of a particular location, these fundamentals can foster or dampen growth. Regardless of underlying market conditions, serviced apartment demand trends have been found to mirror supply trends. This is an indication that the introduction of new stock is quickly absorbed into the market, signalling prolonged periods of undersupply and the potential of unfulfilled demand. Growth in all states has occurred despite stock withdrawals. Demand, quantified as actual room nights sold (RNS), has grown at a rapid rate in Australias most populous states, New South Wales, Victoria and Queensland, with smaller but still significant growth in all other states, as shown in Figure 22. Qld attracts the largest demand due to its strong leisure market.
Source: ABS
Market share varies by state between 18% and 32%. Serviced apartment market share of demand differs between states. Figure 23 shows that the otherwise well developed traveller accommodation market of New South Wales lags behind the rest of the country in market share of serviced apartment demand.
Figure 23
Serviced Apartment Share of Total Rooms Demand by State
35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
NSW VIC QLD SA WA
Source: ABS
21
Despite NSW lagging behind other states in demand, almost all traveller accommodation supply increase in that state was by serviced apartments. Supply, quantified as room nights available (RNA), shows much the same picture as that of demand, as new supply has fed demand growth and vice versa. Interestingly, amongst relatively stable growth elsewhere, in New South Wales, serviced apartment supply additions represented almost all traveller accommodation developed in 2007 and 2008. This has come partly due to the market share shortfall providing developers and investors the opportunity to satisfy burgeoning demand, and also due to the overtly favourable feasibility of serviced apartments compared to hotels, resorts and motels.
Figure 24
RNA 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
4.2
ROOMS REVENUE
The larger product size more than compensates for the service provision limitation to show higher room rate than other accommodation forms. Historically the serviced apartment product has returned higher room rates than other forms of accommodation, as indicated by Figure 26. Higher room rates are possible due to larger and more substantial room product and the presence of two or more bedroom apartments. Additionally, this product attracts higher average daily rate (ADR) due to the fact that serviced apartments represents the majority of new accommodation supply. RevPAR, derived from ADR and occupancy, indicates the revenue per available room. The serviced apartment products ability to attract higher ADR was boosted by favourable market fundamentals including solid demand growth, limited new supply and booming local economies. Under these conditions RevPAR flourished, especially between 2002 and late 2007.
Figure 26
Comparative ADR and RevPAR Performance of Australian Serviced Apartments
Serviced Apartment Supply by State

NSW VIC QLD SA WA
ADR
$154 $142 $130 $118 $106 $94
RevPAR $120 $110 $100 $90 $80 $70 $60 $50
Source: ABS
$82 $70 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
As with actual data, supply market share closely mirrors demand market share. Figure 25 highlights how other states lag a long way behind Queensland in serviced apartments share of the total traveller accommodation supply.
Figure 25
Serviced Apartment Share of Total Rooms Supply by State
35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
SA ADR
Industry ADR
SA RevPAR
Industry RevPAR
Source: ABS
4.3
NSW VIC QLD SA WA
FAIR SHARE
Continued out performance in occupancy and room rate has shown a revenue premium of 10% above the wider market in recent years. Fair share analysis identifies how a particular sub-set of a wider market performs in relation to the market-wide benchmark. A result higher than one represents above fair share and less than one represents below fair share. Figure 27 highlights that serviced apartments consistently performs above fair share occupancy, ADR and RevPAR levels compared to the overall traveller accommodation market. This is due to solid demand growth,
Source: ABS
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newer product and significant product differences to other forms of traveller accommodation. The larger footprint of apartments, especially one, two and three bedroom floor plans, along with the inclusion of self-catering and laundry facilities can justify above market room rates. The market dynamics around the 2000 Sydney Olympic Games period distort longer term trends. Likewise, stock withdrawals and sustained serviced apartment demand growth drove gains in occupancy and RevPAR share between 2001 and 2003. The relatively stable market conditions of the last few years, appears to have enabled occupancy and RevPAR stabilisation at a normalised fair share. It is evident from this data that serviced apartments have found their market price point with an average 5% above market-wide average showing variation of only 2% from that average over the last decade. The occupancy, and therefore RevPAR decline is due to the shorter stay visitor facilities and the penetration into the short stay business segments.
Figure 27
Figure 28 Geographic Spread Rooms ACT NSW NT QLD SA TAS VIC WA Grand Total
Source: CBRE Hotels
% to Total 2.0% 19.9% 2.0% 47.6% 3.6% 1.1% 19.9% 3.8% 100,0%
698 6,985 703 16,705 1,259 386 6,995 1,344 35,075
Serviced Apartment Fair Share

1.16 1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 0.98 0.96 0.94 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Occupancy ADR RevPAR
Source: ABS
There are a number of main reasons that explain the proliferation, or otherwise, of serviced apartments in various locations. The expectation of demand, from both consumers and investors, is a key driving force behind project development. The highest concentrations of properties are located in major cities such as Sydney, Melbourne and Brisbane. This is not surprising given these are the countrys major commercial hubs and biggest traveller accommodation markets. The other main groupings of serviced apartments are in well-established leisure tourism destinations such as Gold Coast, Sunshine Coast and Northern New South Wales. The appeal to private investors has been a strong influencing factor in the development of these locations.
4.4
GEOGRAPHIC PROLIFERATION
Location mirrors the major business drivers, coastal locations for leisure customers and city and some regional centres for corporate. Whilst it is evident that serviced apartments have been a dominant feature of traveller accommodation in Australia over the last decade, growth has not spread equally across the country. Certain locations have a proliferation of serviced apartments while in other locations they are all but non-existent. Data from CBRE Hotels Traveller Accommodation Property Database is used as the basis for geographic tracking of serviced apartment properties around Australia and within each state. Figure 28 shows the location clusters of serviced apartments by state.
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5 THE SERVICED APARTMENT INVESTMENT

Distinct characteristics differentiate the sector. The investment characteristics of serviced apartments exhibit two key elements which combine to distinguish this asset class from others. 1. An ability to invest in major hospitality projects through secured leases or by way of management agreements tied to major hospitality operating companies and, 2. The flexibility of strata titles enabling multiple exit strategies
The introduction of the Managed Investments Act 1998 has gone a long way toward addressing the problem and placed greater responsibility on the developer to account for potential investment risks associated with what is fundamentally a business based investment product. Notwithstanding these initial challenges the investment market has recognised the evolution of the serviced apartment product which now offers experienced developers and, as borne out by the Horwarth data, a competitive business model run by proven professional operators. Major operators have worked with developers of strata title investments to create a suitable pipeline for their organisations.
5.2
Strata titling engenders investment flexibility. The unique blend of major hospitality business and strata real estate has produced an investment class that has given opportunity for individual mum and dad buyers to enter a sector previously the domain of high net worth individuals and institutional investors. The maturation of the serviced apartment industry in Australia has built a platform where not only can they be sold in one line in similar fashion to traditional fully service hotels, through scaled portfolios, they can now attract the attention of institutional investors.
INDIVIDUAL INVESTORS
The decision to invest in serviced apartments by individuals can include: An affordable entry price. Serviced apartments offer a physical product close to residential which they understand. An opportunity to be involved in the hospitality sector. The personal use benefits associated with the purchase, particularly in the leisure sector. Personal Tax offset benefits. The expectation of stabile returns (especially when leased to a credible operator). An element of fixed or guaranteed return (in some projects). Locational and aesthetic appeal. Serviced apartments are now a recognised market segment with recorded trading volumes. Conversion potential for straight residential use alternate use / exit. Bank fundable.
5.1
THE ROLE OF STRATA TITLING
Emotive acquisition and investment arbitrage favouring individual apartment investment fostered development. Strata-titling has been pivotal in the development of the Australian serviced apartment industry. The ability to sell apartments to individual investors enabled higher returns on capital invested in the construction phase for developers and supported financing of development. In the early years, it was typical to find guaranteed returns offered by developers to underpin sale prices. Following a spate of failed and mismanaged projects the market became weary of fixed returns and took a closer look at the operating performance of serviced apartments and their development models. Economic rationalism will likely prevail going forward.
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Comparative Investment Returns

Return driven investment with variable or secure risk appetite. Two types of return exist dependent on the operational structure i.e. A variable return based on market and property performance for those managed under a letting or management agreement and A fixed return for those leased. Investment size generally ranges between $200,000 and $500,000 for apartments with the most relevant alternative investment being residential. Pre tax comparative income returns for various similar sized new investments are outlined in the following table.
Figure 29 Comparative Investment Returns For Individual Investors Investment Type Residential (Major City) Serviced Apartments Commercial Strata (Office/Retail/Industrial)
Source: CBRE Hotels
Attractiveness of serviced apartments to institutional investors is underpinned by asset fundamentals such as: Multiple exit options via strata title enabling disposal of complete or part portfolio as required. Higher trading margins (lower breakeven point) for serviced apartments compared to other traveller accommodation classes. Establishment of leased serviced apartments by major operators. Close relationship to residential due to design characteristics providing alternate exit strategy. An ability to selectively build portfolios across the industry. A growth opportunity as the market continues to develop.
Comparative Investment Returns

Return 3% to 4% + 5% to 6% + 5% to 6% +
Performance indices are composed (duplicating the PCA Hotel Index) to compare Serviced Apartments to other asset classes. In considering the institutional investors returns it is worth looking at the analysis of comparative income return and capital return for Australian institutional grade hotel, serviced apartment, retail, office, and industrial asset classes. Data utilised in this comparison has been taken from the following sources: Sydney hotel data is derived from the Property Council of Australia valuation analysis of a benchmark theoretic four star property in Sydney. Serviced apartment indices have been created by CBRE Hotels using similar methodology benchmarking a theoretic four star serviced apartment in Sydney as well as a national benchmark. Retail, office and industrial asset classes are analysed at a national level through Investment Property Databank (IPD) data. Whilst a range of property classes are presented in the analysis below, only hotels and serviced apartments will be expanded upon.
The pricing framework (where is the fit) in the risk/return profile.
5.3
INSTITUTIONAL INVESTORS
Size matters. Institutional investors have not yet fully explored serviced apartment assets in Australia. Real estate investment trusts and other investment funds generally seek investment opportunities of scale that maximises management effort. Their appetite to date has been for securely leased investments. This combination has been evolving in the Australian serviced apartment sector. Portfolio massing, variable exit opportunities and performance strength gives the sector attraction. The establishment of scaled operations such as Mantra, Quest, Toga and Oaks provide platforms suited to portfolio massing which would fit investment by institutional investors.
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Income Return
Traveller accommodation asset income returns react to the market in a unique way. As an inherently dynamic investment, hotel investors generally seek higher income return than office and retail investors. However, serviced apartments have emerged in the middle ground. This is due to the market acceptance of the product and the proportionately higher development of new stock.
Figure 30
Asset class income return (indexed)
325 275 225 175 125 75
De c95 De c96 De c97 De c98 De c99 De c00 De c01 De c02 De c03 De c04 De c05 De c06 De c07 De c08
Figure 31
Asset class capital return (indexed)
180 160
Retail
140 120 100 80 60
Office Industrial Sydney Hotel Sydney SA Australia SA
Retail Office Industrial Sydney Hotel Sydney SA Australia SA
Source: CBRE Hotels, PCA and IPD
5.4
One line investment or individual strata sell down, the latter prevails. Physical attributes of serviced apartment product combined with strata-titling provides two strong exit strategies suitable for relatively straight forward disposal. Investors are open to consider either: Total property in-one-line or,
Source: CBRE Hotels, PCA and IPD
Capital Return
Both indexed Sydney hotel and serviced apartment assets saw capital values plummet due to external market shocks earlier this decade impacting international travel. Capital returns are more responsive to external market influences compared to leased asset classes but displays lower volatility and out performance over hotels. Capital return gains were seen during boom trading conditions between 2003 and 2008 as market supply and demand favoured market-wide occupancy and room rate growth. Similarly, the relatively sharp fall in capital values since mid-2008 is indicative of the quick response to market changes and the flight of capital to security in the months following the share market collapse and financial market turmoil. The relative strength of capital returns for serviced apartment investments over time is indicative of lower risk due to sell-down exit strategies, and the growing popularity and acceptance of the matured serviced apartment investment class. Individual strata acquisition. As the business operation is typically separate from property ownership, most operating formats can work regardless of ownership structure. The current market for investment in one-line is suppressed on the back of poor economic and investment conditions. Notwithstanding this general reticence, several serviced apartment groups such as Quest, report buyer interest for total projects from builders and investors whom they have established relationships of trust over recent years. Some groups like Toga have taken the situation in house and chosen to invest in their own projects. A review of proposed serviced apartment development points to support of in one line investment where the fundamental security of ownership are linked to leased property and solid tenant covenants. Individual apartment sale allows residential exit where permitted.
26
De c95 De c96 De c97 De c98 De c99 De c00 De c01 De c02 De c03 De c04 De c05 De c06 De c07 De c08
INVESTMENT EXIT STRATEGIES
Serviced Apartments

May 2010
The basis for individual strata acquisition is the return on investment. In many cases, the individual sell down capability of serviced apartment product provides an alternate exit through conversion to residential investment or owner occupation. The success and profitability of individual sell-down and conversion to residential apartments is dependent on the individual propertys quality, location and market positioning. Prospects are further influenced by market supply/demand dynamics.
6.1 CHALLENGES Industry Association

The sector needs a voice. As the size and complexity of the serviced apartment industry grows, so too does the need for effective coordinated advocacy. Serviced apartments face significantly different needs for representation than other forms of traveller accommodation. The Australian Hoteliers Association (AHA) provides this service for 600 specialist traveller accommodation providers nationally and has served the collective interests of the sector since 1839 to become one of the most powerful government lobbyists. Notwithstanding what appears to be obvious similarities, serviced apartment operators have been excluded from full AHA membership. A charter requirement stipulates that AHA member properties must hold a liquor licence posing a hurdle for serviced apartments without food and beverage provisions. Associate membership may be available to these businesses however does not include the right to vote on policy decisions. Without a say in policy direction, serviced apartments are mostly unable to significantly further their interests through this channel. The Tourism and Transport Taskforce (TTF) is seen as the only available forum for voice and its recognition of this sector is encouraging.
6 THE COMPLETE PACKAGE? CHALLENGES AND OPPORTUNITIES

A sector that learns from the past and prepares for the future will progress. From the inception of serviced apartments in Australia in the early 1970s, stakeholders have used the concept as a means to: Build a fresh apporach to guest services in the accommodation sector. Finance new travellers accommodation. Introduce private individuals to invest directly in the accommodation sector and in some cases secure a holiday home. Support struggling developments. Capitalising on a new investment market. Reposition failing residential product. Over time unsustainable models have been replaced by strategically created target business models with professionally run and operated partnerships where participants are better informed of the risks and benefits. It has taken time to disseminate knowledge and understanding of the serviced apartment product and industry. However there is now an acceptance of serviced apartments as a legitimate investment asset class. The present day dominance of specialist professional serviced apartment firms has had a significant impact in changing these historic views and provides a key indication of the maturity of the industry.
Rating
Ambiguity in rating needs to be addressed. Since 1963 there has been a standardised scheme across much of Australia for rating the standard of traveller accommodation. AAA Tourism (AAAT) is the national body of auto clubs nationwide that manages the STAR rating scheme for traveller accommodation in Australia. The STAR rating scheme consists of fifteen categories of accommodation. Due to the nature of the serviced apartment product, serviced apartment businesses have been found to fall within any of various categories including: Serviced apartment Apartment hotel Self catering Apartment Holiday Unit B&B Self Catering Motel Hotel Villa Cottage Chalet
27
Each category represents set criteria for the classification of star ratings. The absence of clear boundaries allows operators to tailor their propertys classification with the potential for star rating manipulation. A lack of consistency and clarity in the categorisation of serviced apartments leads to inconsistently rated properties and subsequently consumer confusion.
New Development and Market Share Growth

Further development through the favourable alignment of risk, return and feasibility. The growth of serviced apartments is expected to continue and furthermore is likely to accelerate once the worst of the GFC related investment hangover dissipates. The strength of the feasibility equation is supported by product adaptability, multiple exit strategies, and the yield arbitrage through selldown of individual apartments. Under tightened lending criteria, serviced apartments are more likely than other forms of traveller accommodation to receive financial backing from lenders as they represent a less risky investment compared to other forms. Backed by such feasibility, developers are likely to look to take advantage of the under-representation of serviced apartments in certain parts of the country. Opportunity exists for established players in the market to further their presence by capitalising on the favourable alignment of risk, returns and feasibility.
Town planning
Addressing confusion and inconsistency with the Authorities. As the broader property markets comes to grip with serviced apartments, so too has there been a need for local council planning and building departments to understand the nature of this product. The comparison to residential development and short-term traveller accommodation, in some cases, created confusion on how development controls should be applied. The solutions prescribed by some local councils have produced more onerous constraints on serviced apartment development. Issues relating to approved use and limitations of use can become mutually exclusive to building control requirements and unduly penalise developers. The debate continues on how to present a consistent approach to this hybrid residential / traveller accommodation product. Issues revolving around adequate fire protection measure to the requirement for lift services in buildings vary from council to council and mean that budget planning for new projects requires close consultative measures.
Institutional Investment
Broadening the investor base. To date there has been limited involvement by institutional investors in the Australian serviced apartment industry. The evolution of a strong, distinct and mature asset class has much to offer institutional investors through significantly de-risked income returns and solid capital returns. Yield accretion and sell-down exit options potentially provide an ideal institutional grade investment opportunity.
Opportunities
Room for improvement. Based on the preceding analysis in this paper, the future appears bright for serviced apartment development, business performance and investment in Australia. Growth in consumer demand for apartment-style traveller accommodation supported by investor interest and development feasibility will create a robust platform for industry growth. That said, the current strength of the industry belies room for further improvement and adjustment to move forward in the best possible way. Some selected key areas of opportunity are offered below:
Expansion of core customer base

Widen market appeal to international travellers. A successful serviced apartment industry has been built on domestic customer demand. Domestic demand, as opposed to international demand, is generally seen as more robust and resilient to external shocks and forces that periodically affect tourism. Despite this, there is a significant future role for international consumer markets in diversifying and growing demand. As long as serviced apartments continue to attract well below market proportion of international customers, there is an opportunity for savvy operators to package their product to appeal to foreign travellers.
28
Serviced Apartments

May 2010
NOTES
29
Serviced Apartments

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Australian Serviced Apartments: The Formation of an Industry

Prepared by CBRE Hotels

SERVICED APARTMENTS: THE FORMATION OF AN INDUSTRY

The Formation of an Industry

6  The Complete Package? Challenges and Opportunities

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

SERVICED APARTMENT DATA DEVELOPMENT

1  THE EMERGENCE OF SERVICED APARTMENTS IN AUSTRALIA

Traveller Accommodation Property Database

Traveller Accommodation Development Database

Serviced Apartment Operators Survey

Serviced Apartment Investment Index

Acknowledgement and Recognitions

The Formation of an Industry

Optional daily room servicing Maximum stay of one year

1.2  EVOLUTION OF THE SERVICED APARTMENT INDUSTRY

SERVICED APARTMENT EVOLUTIONARY TIMELINE

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

2  INDUSTRY LEADERS AND KEY PLAYERS

Oaks Hotels & Resorts Limited

Mantra Group (formally known as Stella Hospitality)

Quest Serviced Apartments

The Formation of an Industry

Mirvac Hotels & Resorts

StayWell Hospitality Group

Meriton Serviced Apartments

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

The Formation of an Industry

2.2  TALLY OF SERVICED APARTMENT OPERATORS

Major Australian Serviced Apartment Operators Properties Keys Star Rating

Mantra Group Peppers Mantra

9901 469 6703

4900 1595 1047 182 366 2031 1786

69 438 1172 1429

1046 495 352 143

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

3  DNA OF THE SERVICED APARTMENT INDUSTRY

Minimisation of food and beverage, a departure from traditional hotel accommodation.

The Formation of an Industry

Figure 5 Serviced Apartment Customer Profiles Corporate Leisure

Productattributes Home away from

Home away from

Convenience to business locales

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

The Formation of an Industry

CBD Location 18 % Domestic International Leisure Location 82 %

75% 90% 80%

25% 10% 20%

Source: CBRE Hotels

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

Figure 9 Leisure/Corporate Customer Mix of Major Australian Serviced Apartment Operators

Source: CBRE Hotels

The Formation of an Industry

Figure 10 Construction Cost Analysis Hotels Serviced Apartments

4,736 47% $46,213,00

5,960 60% $27,380,00

Availability and land values

Serviced Apartments: The Formation of an Industry Prepared by CBRE Hotels

Potential for body corporate log-jam

Potential underperformance when compared to pre opening expectations

The Formation of an Industry

Primary Business Drivers

Distinct Operational Attributes Room rates & pricing

6 The Complete Package? Challenges and Opportunities

1 THE EMERGENCE OF SERVICED APARTMENTS IN AUSTRALIA

1.2 EVOLUTION OF THE SERVICED APARTMENT INDUSTRY

2 INDUSTRY LEADERS AND KEY PLAYERS

2.2 TALLY OF SERVICED APARTMENT OPERATORS

3 DNA OF THE SERVICED APARTMENT INDUSTRY

Business Operating Frameworks

4 SERVICED APARTMENT MARKET FUNDAMENTALS

National Growth and Market Share

5 THE SERVICED APARTMENT INVESTMENT

6 THE COMPLETE PACKAGE? CHALLENGES AND OPPORTUNITIES