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Estate Living explores whether developers should expand into the aparthotel market. How appealing is this offering, and will we see more of them? Two experts share views of interest to potential property investors.
What’s the diffs?
Apartments and aparthotels have much in common: both are self-catering with a kitchen/kitchenette, living area, and one or more bathrooms. Some offer appliances such as washing machines or dishwashers.
With the number of bedrooms ranging from one to three or more, both are convenient for families and larger groups. Self-contained, they are available for short or long-term stays and usually significantly cheaper. (The cost of an average apartment is less than that of a double room in a hotel.)
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Apartments are generally not serviced, but many aparthotels provide the same benefits as a quality hotel. It’s actually a small apartment within a hotel and often run as a hotel, with daily or 24-hour reception.
A new travel scene
Alan Campbell, ANEW Hotels & Resorts marketing director, says: ‘Travel has changed in so many ways since the pandemic, and the appeal of aparthotels is increasing.
‘With rising fuels costs, air-tickets and inflation, people are travelling less frequently but for longer periods, maximising travel spend and taking advantage of the escalation in remote working opportunities. These longer stays often include a leisure portion for business travellers, and a stay-and-explore approach by holidaymakers.’
Campbell says with longer stays comes an increased need for serviced self-catering spaces where travellers can make themselves at home while enjoying the perks of being away. Services may include cleaning, laundry, selected meals and more.
‘ANEW along with several other hotel groups have anticipated this and adjusted course to include these offerings. Certainly, the development of new properties tailor-made for the purpose has huge potential.
‘Always remember the old property saying about location: comfort comes from your surroundings, too, and travellers are mindful about where they take root for their stays.’
Check that yield
Landsdowne Property Group CEO/founder Jonathan Kohler says many developers are partnering with hotel operators for increased yield. Typically, they first launch a couple of fully furnished apartments for rent, and rope in an operator to run these as part of its hotel pool.
‘Some developers are partnering with hotel operators to increase their rate of sales, at the promise of greater rental yields for purchasers. The developer would go out to market and offer a guaranteed rental yield of, say, 10% for the first two years to encourage buyers. This applies to furnished apartments in the hotel-rental pool.
‘But the above model presents certain challenges. Depending on size, furnishing an apartment can cost as much as R200,000 – expenses that must be considered every five years or so, subject to wear and tear. As purchaser, you need to ensure that furniture costs are covered by the increased rental received.
‘Another consideration is what the rental yield would be after year three’s guaranteed 10%. In many cases, the first two years’ guarantee is included in the purchase price, so the hotel operator has collected two years of your property’s yield without paying you a cent.
‘In year three, you receive a yield based on occupancy that, when low, decreases your yield. When developers who have partnered with the operator keep their own apartments in the hotel pool, theirs will always take guest-placement preference over yours.’
Happy feet
One of the major benefits of a hotel pool in your apartment building is the increased foot traffic it brings to your lifestyle centre and restaurant. It’s common knowledge that even in estates with 1,000+ apartments, restaurants and small business operators struggle to get the critical mass needed to make enough revenue to survive.
‘The hotel pool brings a constant flow of visitors and management expertise into these estates, which can help them significantly,’ Kohler advises.
Good neighbours aren’t guaranteed
Kohler says they have managed buildings where the relationship between hotel operator and body corporate deteriorated to such an extent that they landed up in litigation.
‘Owner occupiers and long-term tenants find that hotel guests do not adhere to body corporate rules and, over time, end up voting the operator out of the hotel. Prospective purchasers should ensure the correct constitution is set up to protect their asset.
‘Difficulties may arise if a portion of your development is run as a hotel, and homeowners clash with hotel guests, who may be ignorant or choose to disregard rules instituted by the establishment.
‘Selling to investor buyers who plan to rent their properties out is attractive for developers. But homeowners are often scared off by the rate of people traffic, and no control over the quality of next-door neighbours.
‘Setting up your constitution in the beginning is crucial. Once body corporates are formed, long-term agreements can be made with the board of trustees, and rules amended during AGMs.’
Final cautionary note
Kohler concludes: ‘Before investing in aparthotels, do your homework on who’s partnered with the developer, the hotel’s occupation rate, and the surrounding area’s reputation.’
