So, Ben, what design-led projects has Saxbury recently been involved in?
We cannot help leaning towards an operator with a clear vision, such as UK brand room2, which identifies itself as the world’s first hometel. What we like most about room2 is the attention to detail - the playful design and a feeling of quality in each of their premises - and we’re working together on some large projects as they roll out of their hometel concept across the UK. Generally, we take an agnostic approach to operator search and selection however, we have noticed our clients are beginning to put sustainability front and centre, not just in the operations but also in a building’s energy output.
What is Saxbury’s take on the current ‘state of play’ with short term rental operators, has COVID-19 upended things entirely, or do opportunities still exist?
Good question….this is a start-up operators moment in the sun; in the past, they would be at the back of the rental queue - behind the established firms – several well-capitalised foreign firms have signaled their intentions to expand into the UK. A common theme among newer operators is their attention to interior design. It is no secret that beautifully furnished apartments will jump off the page and attract a higher nightly rate. This contrasts with some of the more established corporate housing companies that paid less attention to style, as their business guests were previously driven by lower cost.
We know that operators like to lease fully furnished units, yet our clients often prefer the hands-off approach. To avoid the stress, we usually liaise with Fulhaus who will take care of interior design, delivery, and installation for a good price; if the operator is happy, invariably our client is too.
In pre-covid times, the hospitality and tech investors pile cash into serviced apartment operator platforms as they observe massive growth of the short-term rental sector. With a shortage of appropriate hotel licensed buildings, operators - with a business model predicated on short stays - would routinely overpay just to keep up with insatiable demand. Operators would then enter bidding wars to secure a prime spot, alongside a buoyant AST market pushing rents higher still.
Post-covid, we have seen a dramatic slump in the demand for short term accommodation, those with little knowledge of the residential market have tried to adapt to the new landscape, but sadly many have failed, while properties operated by hosting companies have also disappeared into long term housing. Some of the more established serviced apartment operators – which have survived past economic crashes – were quick to pivot to ASTs and, for those who have survived, I would think the future looks quite positive. When bookings do begin to roll in again those remaining in business will find they have far fewer competitors.
Now on to risk versus reward; I read that Domio and other firms are moving away from the master lease, is this model dead and if so, which operating models are gaining traction?
In one word, no. Operators are still leasing properties albeit gone are the days of bidding wars. When Saxbury takes on block rental instructions, we like to educate our clients – who are often new to the sector - about the myriad benefits of leasing to a serviced apartment operator, such as reduced management, lower maintenance costs, no voids for five-years etc. Our clients are under no illusion that the operator is living in the flats, in a rent to rent environment the operator strives for 20% EBITDA margin therefore, we ensure the operator is also making money! Firstly, we would ensure we lease to a reputable firm with a track record for maintaining their properties. Secondly, we ensure the landlord’s net monthly income is as good as it is with individual ASTs. And thirdly, we ensure we reach a responsible deal between landlord and operator.
Operators may prefer management contracts or turnover based rental agreements, but most residential landlords are leveraged, and their lenders would not entertain anything less than guaranteed income. Of course, income can be a great deal higher when operated as short let, so if landlords are willing to have skin the game the upside is very tempting.
About Ben Davis and Saxbury
Ben Davis co-founded Saxbury in 2017 following an extensive career in the serviced apartment sector. Saxbury is an agent providing serviced apartment and aparthotel investment and development advice. It is recognised as the UK’s leading niche practice extending a focused and tailored approach to operator search, packaging investment sales, purchases, and structured development finance. Our team has accumulated over 50 years of experience, successfully completing transactions in a broad range of lot sizes. Visit www.saxbury.com for more information
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