Tough economic times force operators to diversify their customer base

Operators of boutique serviced apartments in Hong Kong are rapidly rethinking their strategies as a result of the financial crisis hitting demand from the banking and finance sectors.

'Hong Kong is experiencing an oversupply of serviced apartments based on the present demand projection and under the overall macroenvironment. Because of the oversupply, competition is getting more intense,' said Alexander Bent, a managing partner of Kush Living, a serviced apartment operator, which entered the Hong Kong market three years ago and now manages three serviced apartment properties on Hong Kong Island.

The financial crisis has considerably changed the client mix of most serviced apartments, with an obvious drop in tenant numbers from the banking and finance sectors.

'Before the financial crisis last year, the majority of our clients were from banks and financial services companies, but now we have to refocus on multinationals, accounting firms and law firms,' said Mr Bent, adding that the crisis provided an opportunity to help the company diversify its client base.

'We have guests from a wider range of industries such as telecommunications, information technology solutions and wineries. We have adjusted the rents down 50 per cent and, in spite of that, we can still maintain a competitive occupancy level in the current climate.'

Pilar Morais, executive director of CHI International, said tighter budgets meant that companies now opted for boutique serviced apartments for their overseas staff as a more practical choice of accommodation than hotels. Understanding that clients' budgets have been dramatically reduced, the company now offers lower rates and shorter, flexible leasing terms for guests.

According to Mr Bent, there is a significant fragmentation in the serviced apartment industry. Many residential block owners are refitting their properties into serviced apartments for a higher yield on the building, but without understanding how to properly run a serviced apartment business.

Operators cannot merely rely on more flexible leasing terms and competitive rents to lure customers. Positioning itself as an operator of boutique serviced apartments, Kush Living focuses on lifestyle aspect and emphasises the importance of d?cor, interior design and personalised service for guests.

Dinesh Nihalchand, another Kush Living managing partner, said: 'We feel that a lot of earlier players, even the current players, have not put as much emphasis on the design aspect of serviced apartments.

'When you combine design and service, it creates a compounding effect on the overall customer and guest experience.'

Kush Living has developed a lifestyle programme which allows tenants to enjoy the privileges, benefits and discounts offered by a host of Hong Kong's finest restaurants, private nightclubs, and spa and fitness centres that the company has specifically identified. 'We have packaged a portfolio of choices that we think matches their tastes,' Mr Nihalchand said.

Intensifying competition in Hong Kong's serviced apartment market means that some operators are considering expanding their portfolio into overseas markets to capture new business, especially on the mainland.

Shama is a key player in the sector, operating 16 serviced apartment residences in Hong Kong and the mainland, offering 2,500 apartments. Chief executive Elaine Young said: 'We are looking at two prime locations in Hong Kong, but our real focus is on the mainland and India, and in key gateway cities across Asia.'

The company should offer more properties by the end of the year in Beijing, Chengdu and Dalian on the mainland, and in Bangalore in India.

New sites for serviced apartment operators are being created with the development of West Kowloon and new office space in Kowloon such as the International Commerce Centre (ICC).

'Pricing is an important factor. Residential blocks are cheaper in Kowloon, so it is easier for operators to make the yield,' Ms Young said. 'Kowloon is a strong market because the ICC is set to offer new office space for many companies, so demand for serviced apartment accommodation for their overseas staff in Kowloon will be strong.'

CHI International recognised this growing demand early and opened two serviced apartments in Shanghai Street last year, with a third one in Nathan Road added to the company's portfolio this year, providing a total of 125 units. It also has its residence in Sheung Wan on Hong Kong Island.

Finding the right assets and staffing them with quality people is a key challenge many operators face in this business.

Ms Young said: 'It doesn't matter how fantastic a property one builds, even in the best location, if it is staffed by inexperienced, unsuitable people, the potential will never be met.'