Here, I highlight some of the reasons why we are confident about lending to this sector.
Weight of capital
When assessing the development loan of an operating or leased asset, one of our key underwriting criteria is to ensure there is a robust exit at practical completion. Over the past few years, the number of institutional investors interested and actively investing in serviced apartments has significantly increased with investment volumes growing more than fivefold from £89m in 2010 to £486m in 2018. The buoyant investment market gives us confidence in the asset’s liquidity and the appetite for built stock to be absorbed by the market.
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Along with a strong investment market, the ability of serviced apartments to attract refinancing has improved. A few years ago, when the serviced apartment sector was in its infancy, the market was dominated by a few small operators. Fast forward to today, and several institutional brands have emerged with much better covenant strengths facilitating access to the long-term debt market. Moreover, a number of large international operating brands have been known to sign three- to 25-year leases in order to gain market share, which makes the completed assets even more attractive for long-term debt providers.
Defensive asset class
In an uncertain Brexit environment, we believe serviced apartments have many defensive characteristics. Although Brexit has reduced lodging demand for corporate travellers, this fall in demand has been counteracted by an increase in leisure travellers from abroad, who are looking to capitalise on the weaker pound. Encouragingly, these leisure travellers have increasingly looked to stay in serviced apartments as they have grown to expect a home-style type accommodation, in part due to the popularity of Airbnb. As a result, we are encouraged that the sector will be able to attract both corporate and leisure travellers and sustain occupancy and revenue levels in the long term.
Furthermore, given the limited service requirements, we believe serviced apartments are less susceptible to potential labour shortages that a traditional full-service hotel could face, making them less vulnerable to rising operating costs. With both steady demand and costs reasonably controlled, we have increasing confidence in this asset class.
Increase of stock and transparency of data
Over the past four years, the number of serviced apartments has increased by around 40%, from approximately 17,000 units in 2015 to 24,000 in 2019 in markets across the UK. The increase of stock has improved availability of operating performance data, which gives us further confidence in our underwriting assumptions and we believe the market still has room to absorb almost double the number of units currently available without a reduction in operating levels.
At Maslow, we are enthusiastic about the sector and will look to support the development of the right hotels and serviced apartments that have lean operating models or pre-leases and which are in strategic locations that cater to both business and or leisure travellers. With our unconstrained balance sheet and specialist knowledge of the development process, we have the ability to structure and deliver a variety of lending solutions for experienced developers in the UK.