With a surfeit of creature comforts, serviced apartments have long been a popular choice for expatriates on deployment in China. Shanghai has seen brisk business. The number of serviced apartment properties in the city has risen from 9,000 in 2002 to 12,000 today. Another 4,000 are slated for completion by the end of 2009.
However, the current global economic troubles mean multinational firms are expected to send fewer workers to China. The serviced apartment market will have to adopt new strategies to deal with the loss of some of its bread-and-butter clientele – American and European expats.
"Due to the turbulence in the global economy multinational companies are cutting their operation costs and laying aside expansion plans for the time being," said Jane Alexander, senior director of CB Richard Ellis (CBRE) in Shanghai.
Alexander also expects occupancy rates, another barometer to gauge the soundness of the market, to drop from 80% to 70-75% in Shanghai over the next six months.
Concerns about the serviced apartment market come at a time of softening prices in the residential real estate industry as a whole. Property prices in 70 major cities posted their first month-to-month drop in August, and those in Shanghai saw a 0.2% fall, according to statistics released by the National Development and Reform Commission.
Yet lumping serviced apartments in with the trends of the broader residential real estate market is not always informative, said Hans Galland, vice president of Jones Lang LaSalle Hotels. He argues that there is not much of a connection between the serviced apartments in Shanghai and the overall residential property market.
"In general, we feel that demand fundamentals are very stable when you look at rents and the occupancy rate over the past few years," Galland said. "Given the overall economic growth of Shanghai, we are optimistic about the future serviced apartment market outlook as more expatriates are expected to move into the city."
This long-term view is also pushing serviced apartment providers to look beyond first-tier cities like Shanghai. As an influx of foreign direct investment heads into second tier cities like Tianjin, Hangzhou, Chengdu, Chongging, Xi’an and Wuhan, serviced apartment operators are following.
"Manufacturing companies are moving their factories and plants from the east to the western part of China because of lower labor and land costs," said Elaine Young, CEO of Shama, a serviced apartment operator. "There will be increased demand for expatriate housing in these areas."
Shama is slated to open a property in Dalian in January 2009, in an economic zone where companies such as Intel and other manufactures are located. Also in the first quarter of next year, the company will move into Chengdu, a financial and electronics center for China’s southwest.
Though lower costs also benefit the serviced apartment companies that move west, competition is heating up.
"With so many hotels and serviced apartments opening, there is a shortage of good people," Young said. "Competition will increase from both the hotels offering long stays and from individual landlords leasing their furnished apartments at cheaper rates."
The line of distinction between hotels and serviced apartments is blurring. International hotel operators, such as Marriott International, Shangri-La Hotels and Resorts, Kerry Properties and Starwood Hotels & Resorts, have all entered the serviced apartment arena under their own brand names. At the same time, serviced apartments are branching into short-stay markets.
The Ascott Group’s Citadines property in Xi’an "does very well in the short-stay market," said Richard Ong, the group’s vice president for China operations. "As more people understand the beauty of staying in serviced residences, we tend to get more short-stay business."
Despite the increasingly crowded market, more potential customers means overall demand is expanding as well. Even if there is a slowdown in expatriate arrivals from the US and Europe, other customers will pick up the slack, according to Malcolm Hines, general manager of Oakwood Residence in Hangzhou.
"An influx of some new customers from Singapore and Taiwan should help offset the negative effect that will undoubtedly be felt from the subprime crisis," Hines said. "India is also increasing as a source market because BPO (business process outsourcing) specialists from India are contracted in China."
Hines also expects China’s growing middle class to boost the market as more and more upscale travelers use serviced apartments rather than hotels.
The long game
In addition to its Hangzhou location opening in November, Oakwood will launch serviced apartment properties in Shanghai early next year and is scheduled to open more than 2,000 units across five cities by 2010.
By that time, many hope that in markets such as Shanghai, the economic fundamentals driving demand will overshadow any temporary downturns in the market cycle.
"[The current financial turmoil] will not alter our long-term view of Shanghai’s serviced apartment market, which is becoming an international metropolis and a financial center," said CBRE’s Alexander.