The serviced apartment sector has been billed for big things in Europe. Though an underdeveloped market compared with the US and Asia Pacific, there is potential for those looking to set up shop – but which of its key cities offers the strongest growth prospects?
To rank European cities for the serviced apartment, or ‘extended stay’ sector, we analysed factors related to demand and supply. On the demand side, the presence of large corporates, a sizeable employment market, GDP and employment growth forecasts and the size of the overnight visitor market were all key considerations. On the supply side, current stock levels, including that of hotels, were also examined. A total of 35 European cities were benchmarked, with the markets that came out ahead being Dublin, Stockholm, Amsterdam, Berlin and Barcelona.
The top five cities ranked highly due to their sizeable corporate and overseas visitor markets, with strong GDP outlook and employment growth. More importantly, they also had very constrained stock levels relative to their overnight visitor market. For example, Dublin and Stockholm had some of the most constrained levels of supply, with 0.08 and 0.1 extended stay units per 1,000 overseas visitors. Dublin’s position as a key opportunity market has already been recognised by some, with three schemes totalling 273 units expected to complete by the end of 2018.
Despite the status of the extended stay sector across Europe being a relatively immature asset class, growing awareness and a stable operational model are boosting its profile to investors, developers and lenders. A total of €416.5m was invested in the European sector in 2015, representing a year-on-year increase of 32.9 per cent. Of that, 90 per cent was invested in the UK, 7 per cent in Germany, 2 per cent in Switzerland and 1 per cent in Belgium. As new ‘investable’ grade stock comes to the market we should see more activity going forward as it's lack of built stock, rather than appetite, that is containing transaction volumes.
While it didn’t make the top five, London did feature in our top 10 ‘opportunity’ markets. The UK capital remains a highly liquid investment environment and the largest target market for expansion, with almost 1,400 units in the development pipeline with stock levels set to increase by 13.3 per cent over the next three years.
So what does the future hold for the European extended stay sector? We anticipate that evolving consumer trends, particularly of millennial business travellers, and the success of Airbnb in highlighting alternative accommodation options, will help the sector further tap into existing unmet demand and beyond. Although the lack of investable stock remains a constraint, we expect these top five European cities to see strong levels of investment in the sector over the next few years.