The ‘hotelification’ of the living sectors, such as the increasing service levels and amenity offers in student accommodation, senior living and residential, created a major opportunity for real estate investors and new operators. Can hotels look to other sectors for inspiration, is there opportunity for the further blurring of concepts and what living sectors are investors most focused on?
“Investing in these alternative sectors or more nascent property classes, it really creates an opportunity for the investor to achieve outsized returns and a lot of that would be done by supporting and growing a scalable business,” says Lauren Okada Young, senior vice president of real estate investments at Brookfield Asset Management, which owns aparthotel and serviced apartment operator Edyn as well as 159 student housing properties.
She says that the group has seen “significant” rental growth and cap rate compression over the years in student accommodation, which helped achieve returns, while longer stay accommodation has had a “very stable cash flow profile”.
“I would argue [it’s] less risky than traditional hotels because you not only have the ability to revenue manage the rate, but you have the ability to do so through the length of stay as well… you can really secure your occupancy by leaning on longer length of stay to fill that base business, and then once you get to the days where people want to stay [for shorter periods], that’s when you can really push the rate,” she explains.
Having secured an extra £105m in debt funding from Blackstone and KSL earlier this year, Edyn’s expansion is showing no signs of slowing down, with a further London acquisition announced in September.
What can the living sector learn from hotels?
But what can the traditional hotel market learn from the living sector, or vice versa?
Victoria Campbell, CEO of Campbell Property, which focuses on student accommodation, says some areas of student living are taking a hospitality-inspired approach, particularly at the more premium end.
“What we’ve seen in the market is a bit of an arms race in terms of providing increasingly wild and wonderful amenities,” she says, whether that’s gyms and cinema rooms or karaoke booths and slides.
“There is now much more focus on what amenities, what services we should provide because all of those things have an impact on the net operating income (NOI). If you’ve got big communal areas, that’s 20% of your building that isn’t revenue generating. It’s another X% on your operational expenditure (opex) cost because you’ve got to clean or service it. I think the industry has come round to the idea that they need to design with a market in mind and be much more focused on the return that that gives them.”
Honor Barratt, managing director at retirement apartment company Birchgrove, stresses that not enough businesses and sectors acknowledge the value of older people, despite this group being particularly loyal, relatively wealthy, and able to contribute valuable midweek spend.
“The curation of the ground floor is something that is often overlooked. The hotel sector does this incredibly well and we can really learn from that,” adds Sarah Christie, co-founder and co-CEO of Balance Out Living. She adds that hostels do particularly well at community building to an extent that many accommodation segments have failed to emulate.
“It comes down to staying in a building that has a strong anchor of food and beverage on the ground floor,” she concludes.
Know your community
Understanding the community of a site and the resident it will attract in granular detail is particularly important to Campbell, who says the business’ approach to hospitality is different practically on a building-by-building basis.
“It didn’t really work until we started doing those focus groups and research to understand what people wanted,” she says.
She emphasises the group’s focus is not just on students as a homogenous group, but consistently asking the question: for which students is a property being developed? In some sites, she says, domestic students are not interested in ‘organised fun’, whereas first years and international students living in studios appreciate the opportunity to participate in activities – implementing an overarching policy across all sites just didn’t work.
“It drove home to us the importance to target the both the physical and service offering to the segment of student,” she explains.
A recent discussion at the Resort & Residential Hospitality Forum similarly concluded that developers and operators that can create sociable environments and a sense of community within branded residences and new living concepts were the most likely to succeed.
Post-pandemic shifts in living sectors
However, like all sectors the pandemic has impacted different living segments in different ways, so how have these areas evolved post-pandemic and which ones are still proving attractive to investors? Campbell says, for example, that there has been a shift towards more flexible and shorter rental terms in the student sector.
“In Covid, operators were forced to offer students, particularly international students, term-based or semester-based rental contracts and renewals,” she points out. She highlights that, although this may not initially have been attractive for operators, the group has found around 90% of students renew and some occupancy levels even improved on offering this option.
Meanwhile, Christie says the Ukraine war has impacted construction costs, and although capex has been “slightly cooling” post-summer, what hasn’t is the cost of debt.
“We’re seeing that increasing and we’re having to look at other ways we can get around that, mainly speaking to capital partners to see if we can fund deals wholly with equity,” she says.
However, market uncertainties and challenges don’t appear to be putting off investors. “We need to not be distracted by the noise now and focus on the future,” says Okada Young. “We have the appetite to continue investing, we just have to price in that risk accordingly.”
She adds: “Where we’ve had a lot of success is in building businesses in more nascent sectors, so more and more we’re looking into areas we haven’t accessed before. We’d absolutely love to get into the senior living business and it’s just been challenging to find the right entry point. For us, in this competitive market where there’s a lot of capital and investors flocking to these newer concepts and spaces, we have to be a bit open-minded and just make sure that we’re keeping our eyes and minds open to these new opportunities.”
All those quoted in the article appeared on stage at the Annual Hotel Conference held in Manchester between October 3 and 4, in a session called: Hybrid Hospitality: Opportunity in the Living Sectors.