Serviced Apartment Ownership: The Next Investment Trend?

Serviced Apartment Ownership: The Next Investment Trend?

By Alice Truong


Ovolo Group
Ovolo is selling 48 serviced apartments in Sheung Wan, guaranteeing investors a 3.3% return.
Ovolo Group’s latest strategy is unheard of in Hong Kong: The serviced-apartment operator is selling its 48 units in a Sheung Wan building.

“It’s the first time it’s been done in Hong Kong,” said Girish Jhunjhnuwala, Ovolo’s founder and managing director.

Mr. Jhunjhnuwala said the sale of flats at 222 Hollywood Road (view photos)—each of which will carry a guaranteed 3.3% quarterly return—is aimed at giving the company cash to expand.

The idea of selling a branded residence isn’t new in Asia: The Ritz-Carlton in Singapore began selling apartments and penthouses in 2007, saying the hotel brand allows it to charge a 20% to 50% premium. In Macau, the Mandarin Oriental started selling serviced apartments in June.

Indeed, serviced apartments have proven to be a lucrative business in Hong Kong, with rents increasing 10% to 15% in 2010, according to the latest figures by property consultant CB Richard Ellis.

The business model of strata-title ownership, or dividing a building’s ownership to different parties, would give Ovolo the liquidity to purchase and operate additional apartments, Mr. Jhunjhnuwala said.

Ovolo, which operates 245 serviced apartments in Hong Kong, plans to open 63 serviced apartments in West Kowloon in the first quarter of 2011.

“This is a good way to utilize our assets to do more,” he said.

More than 250 brokers have visited the Hollywood Road show flat since the units went on sale Tuesday—a strong showing, said Raymond Fung, investment director at Knight Frank, the sole agent of the sale.

Ovolo said it would leverage its brand to bring in tenants and manage the premises, collecting monthly rents, which range from 35,000 Hong Kong dollars (US$4,502) to HK$39,000, and distributing a 3.3% return to investors on a quarterly basis. After covering expenses, the operator ends up with a net of about 1%, Mr. Jhunjhnuwala said.

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“We’re offering a guaranteed yield because we’re so confident in the market,” said Mr. Jhunjhnuwala, adding the Hollywood Road building has maintained an occupancy rate of about 80% within the past year. Ovolo purchased 222 Hollywood Rd. from fellow serviced-apartment operator Kush last year, renovating the building in November in preparation of the strata-title sale.

“A 3% rental return is attractive given that returns for prime office or luxury residential property is now sub-3%,” said Ben Ma, associate director of CB Richard Ellis Research. Mr. Ma said a comparable 650-square-foot apartment in Sheung Wan would rent for HK$10,000 to HK$13,000, but Ovolo can charge three times as much because of its brand.

Buyers who intend to live in the units, on sale for HK$8.2 million to HK$13 million, would receive no return and would be responsible for monthly management fees of HK$1,820.

The apartments for sale are still subject to the government’s latest housing measures to combat speculators because the building is zoned as a residence. But Mr. Jhunjhnuwala said he expects buyers to be long-term investors because of the operator’s guaranteed returns. In November, the government levied additional stamp duties of up to 15% for properties bought and sold within two years and lowered the mortgage limit to 50% for residences valued at HK$12 million or above.