Apartments make the grade

Serviced apartment developer Lamington Group has agreed an institutional sale and leaseback for its Southampton Room2 site, in a move that puts down a marker for the growing sector.  

After a year that saw serviced apartments clearly outperform mainstream hotels, the sub-5% deal provides clear evidence of the value now being seen in the alternative accommodation class.  

The transaction with Aberdeen Standard Investments is valued at around GBP10m, reflecting an initial net yield of 4.98%. Lamington Group has signed a 30year index-linked lease.  

Privately held Lamington has two Room2 sites, in London and Southampton, as well as running an additional apartment letting business in London. The Southampton site opened in 2018 and has 71 studio units, each fitted with its own mini kitchen. The Room2 concept includes a ground floor cafe and bar, with meeting rooms and a fitness studio. 

Robert Godwin, managing director of Lamington and Room2, told Hotel Analyst that the deal had been lined up in 2018: “We learned the necessity of getting transactional evidence, to sign leases.” Having gone to the market, the deal with Aberdeen was ready to go ahead in March 2020 – when covid-19 started to impact investment decisions.  

“It was all about finding the right partner – they’ve been very pragmatic, and they have a longterm view.” After a pandemic-induced delay and reassessment, the deal has gone ahead as originally negotiated, “at terms representative of normal times”.  

“The performance has been relatively good,” said Godwin of the Southampton unit, with occupancy at 90% in February 2019. Room rates did soften substantially as the business sought to maintain occupancy from a range of sources. Through 2020, the company says the Room2 sites achieved an average blended monthly occupancy of 70%, compared with STR’s measured 47% for the UK serviced apartment sector as a whole 

Combining open and pipeline properties, Lamington has 900 keys across 8 sites, with plans to grow to 5,000 keys by 2030. Pipeline sites in Manchester, Belfast, Fulham and Liverpool include wholly owned assets, plus sites pre-leased by development partners. The next Room2 is due to open in Chiswick, west London in seven months. Godwin expects the Aberdeen deal to help drive forward other discussions with leasing and development partners – as well as giving him a further GBP10m to invest in the pipeline.  

James Dunne, Head of Transactions at Aberdeen Standard Investments, commented: “The room2 platform in the extended stay market has demonstrated resilience through an unprecedented period of disruption. The ability to pivot between long and short stay augments the lean operational model without compromising on service.  This not only protects business in a downturn but as importantly, should allow for future outperformance with the quality facilities and flexibility of the product being attractive to both business and leisure travellers when markets normalise. We are pleased to be joining the room2 journey and look forward to a successful long-term relationship.”  

In November, Eric Jafari, chief development officer at serviced apartment group Edyn, told Hotel Analyst he was looking forward to the moment when a London investment deal in the sector was achieved with a 4% yield – a rating similar to that achieved in other closely related accommodation niches such as co-living. Reacting to the Room2 deal, he said: “It’s impressive – and it’s nothing but good news for the sector.” He said the transaction would have been impressive enough, had it been a London site rather than a provincial location. “I was quite surprised by the numbers – the yield is sharper than I would have expected.”  

And Andrew Harrington, founder of advisor AHV Associates and a longtime fan of investing in the serviced apartments niche, declared: “I’m not surprised at all – we’re going to see a lot more like this. The aparthotel space was attractive pre-Covid, and aside from the Covid noise, those key attributes have become more visible.”  

HA Perspective [by Chris Bown]: Form an orderly queue, please. If ever there was a time when the serviced apartment niche had demonstrated its attractiveness to mainstream institutional investors, it is now.  

First, there’s the fact that serviced apartments have demonstrated their resilience throughout 2020, outperforming mainstream hotels through the pandemic.  

Second, the big hotel groups are pushing serviced apartment formats ahead more strongly than their mainstream hotel brands.  

And third, Aberdeen’s in. The Room2 deal isn’t the first institutional investment in serviced apartments. But, in concluding after a Covid-induced hiatus – without a financial haircut – it sets a clear marker. With a punchy yield that demonstrates long term confidence in the niche’s flexible, profitable business model.  

Additional comment [by Andrew Sangster]: The holy trinity for investors is risk, liquidity and return. If positioning assets in relation to these factors is three-dimensional chess, serviced apartments appear to be moving into a game winning position. 

Taking the first principle of investing, risk, and serviced apartments have had a good pandemic. They have generally stayed open and continued to trade, albeit with a profit hit. Compared to other sectors of the short-term accommodation market they look resilient. 

Liquidity has historically been a weakness. But the volume of investment in recent years has improved the outlook enormously. There is still a way to go here but the outlook is good, particularly given how the lines between traditional hotels and serviced apartments are increasingly blurring.  

With hotels as an established asset class, investors can make the move into serviced apartments with relative comfort. But hang on. Are hotels really where serviced apartments want to be? 

From a returns perspective, you’ll want to associate with residential if you’re a seller. And residential has a strong institutional following, notably for multi-family in the US and apartments in continental Europe. 

Build-to-rent is still emerging in the UK, but alongside co-living and serviced apartments, the big buzz for buildings with beds seems to be outside of the traditional hotel sector. 

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