Looking at the typical cost heads for the hospitality industry, comparing hotels (indexing hotels at 100) and service apartments
Building costs – Hotels (100%) versus service apartments (80%). Service apartments have a lower capital cost than hotels given the lower complexity and higher free space than hotels. The flip side of course is that higher hotel rooms can be built in the same space versus service apartments.Service apartments contain almost the same amenities as hotels, but the space utilization is much lower for hotels. This gives hotel room an edge over service apartment in terms of investment. But the fact is that a service apartment would be 2X bigger in size than a hotel room.
Land costs – Hotels (100%) versus service apartments (120-130%of hotels). Given the fact that most hotels use large land plot sizes, the economies of scale are better here than for service apartments. Hence hotel rooms would have an advantage over service apartments in terms of initial cost for a given number of rooms.
Permissions and regulatory issues – Each hotel needs approximately 50-60 permission including water, sanitation, health and other clearances. These are definetely not easy in a country like India and push up the initial fixed costs. Service apartments must comply with the building regulations and usually require an all clear from the local health and safety authorities. But this is much easier process, both one time and well as annual inspection wise than a hotel. Hotels must also comply with far more stringent regulatory and compliance measures which push up their costs.
Start up costs and maintenance capital expenditure – Given the lower complexity, the maintenance costs are about 50% of hotels. This is generally true regardless of scale, location or amenities. A typical service apartment will have a restaurant catering service, gym, common areas and entertainment lounges. They save as they avoid complex fittings in both hotel rooms as well as swimming pools, gardens, entertainment services, automatic doors/curtains, high end linen/cutlery etc. The marginal cost of these services far outstrip their costs and maintenance requirement. This also has a spill over in terms of staff costs and maintenance schedules, which furthur pushes up recurring costs.
Staff costs - Given the more entrepreneurial nature of service apartment services in most countries, staff training and retention is a very critical issue. Staff always has the option of going into conventional hotels or resorts and hence innovative schemes are required. This will inevitably push up costs and require more management bandwidth. Revenue based incentives and staff engagement is very important for retention. In my estimate staff costs would be 120-125% of a comparable size hotel. But staff costs are 20% of the overall costs and hence the additional costs may not dent profitability much and instead act as an incentive to get trained staff from hotels. It is critical to treat employees like partners and not just employees like in large hotels. Their ability to engage guests will be critical to long term success.
I will bring to you other aspects to service apartment selection, running, maintenance and client engagement in future posts. But we will examine in detail aspects of building deeply in my next post. Check out Perch Service Apartments Gurgaon.