Real estate conversions are big business.
For the large, branded hotel companies, the most recent earnings season revealed conversions now account for around a third of signings.
This is no longer nice-to-have growth on the fringe of an organization, but rather a core driver of expansion. The response from the big brands has been to feed this, with rapid growth in the number of conversion brands on offer.
Pushing this is the pressured development market, where money to fund building is expensive and supply has become stilted as a result. High interest rates for the foreseeable future mean that many owners are stressed and looking for the best brand to deliver heads on beds at the best price. These two factors have combined to mean that a highly competitive market is causing many to rethink the neon sign over the door.
With the publicly listed hotel companies under duress from shareholders to maintain their pipelines, conversions have, understandably, become a useful source of growth where traditional organic growth is curtailed.
What we have yet to see played out is how much the hotel market is eating itself.
How much of this extra business is cannibalization as hotels hop from brand to brand? How much of these pipelines will prove to be real growth? Keeping the sector treading water may prove to be good news for room rates, but is there a way to achieve real growth and returns?
For Cheval Collection, conversions mean something different.
As I talk to investors around the world, it is clear that the message of a high-quality product with limber operations is being heard across the real estate market, attracting curious owners from other asset classes.
We have found, particularly in London, owners are looking to make the move away from sectors such as office — which have yet to recover to pre-pandemic levels — to serviced apartments, which were able to remain open during those dark years.
London has benefited from the return of overseas tourists, particularly from the U.S., where the strong dollar is being wielded and guests are eager to upgrade their experience and enjoy it with friends and family.
Research collated by the London mayor’s office showed a surge in international visitors, expected by the end of 2023 to be ahead of the record numbers in 2019 and 2 million more than were recorded in 2022, with an extra £674 million ($712 million) in revenue as a result.
Platforms such as Airbnb have educated guests, and serviced apartments have moved into the mainstream, providing flexible accommodation where guests can live as part of the local community.
Spend may be up, but value is a consideration across the segments.
A survey Cheval conducted earlier this year found that, when booking a stay, 77% of potential guests would consider booking a serviced apartment. Looking at traveler behavior, 51.5% of respondents said that they waited for sales periods or special promotions before booking. This was followed by 37.7% of travelers who would book the cheapest rate even if it’s nonrefundable.
Owners benefit from the stripped-back teams at serviced apartments due to the associated lower costs inherent in the model. Guest satisfaction derives from being able to enjoy the space and flexibility of an apartment over a one-room hotel room.
All this delivers value.
For a hotel to switch brands may mean little more than changing the name and booking system. For owners not yet in hospitality, taking a building from office or residential to serviced apartments is often easier than converting it into a hotel.
The model also helps to open more potential locations. Our most-recent opening, Cheval Maison-The Palm Dubai, was successfully converted from residential.
Centrally located office buildings may no longer have the required demand from commuters to ensure they make sense, but they may from potential guests, both leisure and corporate.
Serviced apartments have illustrated their resilience over the past few years and, for those looking to move their property into a growth sector, conversions are growing in popularity.
Offering the potential for true growth in a sector which is underserved, it is no surprise that investors are looking at their four walls and wondering what else they could contain.
Daniel Johansson is director of development and acquisitions at Cheval Collection.
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