Study by bulwiengesa and Union Investment
Extended stay market yet to reach maturity in Europe
• Temporary living concepts growing at different rates across Europe
• Investors need a selective approach
• Good conditions for investing in micro-living in Germany, France, the UK and the Netherlands
• Smaller markets such as Austria, Spain and Ireland provide attractive ancillary opportunities
Socio-demographic changes and increasingly flexible employment conditions are reflected more strongly in the emerging micro-living asset class than in virtually any other current housing trend. Having said that, European markets are still some way off agreeing a new definition of temporary living.
What the European countries do have in common is a highly diverse range of extended stay options. In terms of provider structures, the professionalism and international reach of the players, tax regulations, and participation of the state sector in housing provision, however, there are significant differences. These characteristics create a sharp division in Europe between large, established markets with sustainable return prospects on the one hand and emerging markets that currently offer only limited investability on the other.
The majority of the markets across Europe are at an early stage of development and therefore have not yet reached maturity. That is the conclusion of the broad-based market study into micro-living in Europe conducted by bulwiengesa and Union Investment. For the first time, the most important European investment hotspots in the two most popular market segments – student/corporate apartments and serviced apartments with hotel-like facilities – have been subjected to comprehensive analysis.
About the study
The Micro-Living in Europe study provides the first comprehensive review of the various temporary living segments with their widely different characteristics in terms of provider structures, international reach of the operators, potential demand and development prospects. Alongside the large and established micro-living markets of Germany, France, the UK and the Netherlands, the analysis covers the emerging markets of Austria, Poland, Sweden, Spain and Ireland as being representative of various European market regions. The potential of the market segments examined is apparent from the following figures: the nine countries selected have a total of 50.7 million one-person households, which equates to a third of the total number of households in these countries. Across the nine labour markets, there are approximately 150 million people in work.
From full service to no service – the various solutions
The matrix below shows some of the most important brands in Germany in the different micro-living segments, as well as the main criteria used to differentiate between the various concepts:
Definitions: student apartments, corporate apartments, serviced apartments
Student apartments are mostly furnished studios or two-bedroom apartments with their own bathroom and kitchenette in a dedicated apartment building which usually also contains communal areas (study rooms, communal kitchens, fitness rooms, etc.). The fit-out of the apartments tends to be functional. Services are frequently offered as an additional extra (cleaning, use of washing machines/tumble dryers, etc.), but in some cases are provided by the operator (concierge service, events, etc.).
Corporate apartments (also referred to as business apartments) are broadly similar to student apartments, but the units are generally larger. Since the focus is mainly on customers who are renting for an extended period for work reasons (e.g. commuters, project workers, young professionals), there is less communal infrastructure in the property, while the kitchen/kitchenette in the units is of a higher standard and better equipped.
Serviced apartments are residential units in dedicated apartment buildings (often referred to as boarding houses) and/or apartment hotels. The length of stay ranges from just a few days to up to six months. Rent is calculated inclusive of VAT. Serviced apartments are furnished and have a fully equipped kitchen/kitchenette. Services are offered in addition, which can be of a similar standard to those available in a hotel. The scope varies according to the concept and business type from limited to full service (full service: hotel services similar to those of a three to four-star hotel, e.g. breakfast, laundry service, 24-hour reception, fitness room). In contrast to housing-sector solutions, users of serviced apartments do not sign a tenancy agreement. They are presented with an invoice, like in a hotel, and are not required to put down a rental deposit.
The study identified Germany, France, the UK and the Netherlands as flagship markets for micro-living investment. These four top countries in the European ranking of the most attractive markets for investors are notable for having capital cities and metropolitan areas in which students and young professionals often struggle to find accommodation. In these established micro-living markets, despite the already high level of activity among private investors, as measured by the volume of planned apartment blocks, private supply remains low.
"In Germany, there is significant potential in the mid-price segment in particular, where not enough stock is being built. The prospects are therefore good for residential developers and investors!"
Henrik von Bothmer, Investment Manager Micro-Living
Transaction volumes and returns
It is also noteworthy that in terms of transparency and transaction volumes, the markets for student apartments and corporate apartments in all of the nine countries analysed for the report are more developed than the respective markets for serviced apartments. The spectrum of investable markets is thus correspondingly broader when it comes to student/corporate apartments.
Transaction volume in Million Euro
Smaller markets also offer scope for investment in student and corporate apartments
As the study shows, in the student apartments and corporate apartments segment it is not only the established markets in the major European economies that offer good conditions for selective and ancillary investment, but also the smaller markets of Austria, Spain and Ireland. Among this group, Austria stands out: the available returns put it in the same league as the established European countries, indicating the existence of a stable market.
"The activities of private sector providers in Austria are mostly concentrated on the capital, Vienna, but in future cities such as Salzburg and Graz are likely to benefit even more strongly from the potential demand generated by new lifestyles and ways of working. We will see significantly higher transaction volumes here in the medium term."
Felix Embacher, bulwiengesa
The initiators of the study also expect Ireland and Sweden to perform well, where the residential markets often fail to provide the fast solutions needed by students. This is due to the relatively high levels of home ownership, which lead to smaller rental sectors.
Within the group of small markets, Austria, Spain and Ireland are notable for their accelerating transaction volumes in the student/corporate apartments segment. At EUR 307 million, Austria recorded 230 per cent more volume in 2017 than in 2016. After the UK and Germany, Spain saw the third largest transaction volume in the past year, at approximately EUR 784 million.
According to the study, Spain and Poland are currently delivering the highest net initial returns compared to the rest of Europe. In these more traditional countries, the trends around different living arrangements, the growth of one-person households and a shrinking number of young people all lag the other European markets.
Net initial return 2017
Serviced apartments as a niche product
Compared to student/corporate apartments, the investability of the serviced apartments segment in the small markets is questionable. Even in large and established markets, apartment blocks with services included remain essentially a niche product and still have comparatively poor transaction transparency. Furthermore, the provider structure in this segment is relatively fragmented.
A positive sign in many of the surveyed markets is the strong involvement of both existing and new international operators. “The quality of the offering and the creation of new products and brands will boost the professionalism of the market. Everywhere you look, serviced apartments are becoming an established feature of the investment market, although the pace of progress differs,” said Henrik von Bothmer. This is clearly evidenced by the increase in transaction volumes in this segment compared to previous years. The study reveals that Germany and the UK are the most active markets, accounting for 86 per cent of the entire recorded transaction volume.
Increasing mobility in the labour market and the rise in tourist appeal and activity in many cities are strong drivers of new concepts,” commented Felix Embacher of bulwiengesa. When it comes to extended but limited periods, young professionals, project workers and commuters welcome an alternative to hotel rooms, since hotels are seen as less appealing and less flexible for long stays.
"Potential demand from these target groups is high in many European cities. Strong demand-side support and increasing professionalism on the provider side are good reasons for investors to devote more attention to this relatively young segment in the short to medium-term."
Georg-Christian Rueb, Senior Portfolio Manager
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