Fashion for apartments: Why it is more profitable to invest in service housing than in new buildings

Author

Lesia Solovchuk

In the coming years, investing in service apartments will become an alternative to investing in the primary housing market.

Ukrainian developers are increasingly paying attention to the development of this segment that is not residential real estate at its core, but commercial one.

The investments from constructing commercial apartment buildings (mainly service apartments) pay off on average from 7 to 10 years, and the profit from the private investments is about 10-12% per year, Volodymyr Sementsov, Co-founder and Managing Partner at INSPI Development, explains in a commentary to .

According to the expert, in the next 3-5 years, the share of private investors in the segment of service apartments may increase to 20-25% in the real estate market.

"For a developer, the return on investment in creating service apartments is equal to the return on commercial properties in good locations: office space, regional-format shopping and entertainment centers, etc. And for citizens who prefer to put up the capital for its custody and accrual, there is a weighty alternative to the primary housing market," Volodymyr Sementsov stresses.

He believes that in the near future, investing in service apartments will become a weighty alternative to investing in the primary housing market.

Large regional centers of the country are the most attractive for developing the segment of service apartments, in particular Kyiv, Kharkiv, Dnipro, Odessa, Lviv, as well as the cities with favorable conditions for doing business, for example, Vinnytsia, Zhytomyr, and Ivano-Frankivsk.

There is an increased interest in such properties in the regions with recreational opportunities, for example, on the coast of the Black and Azov Seas and in the Carpathians.

"The development of the service apartment depends directly on the economic conditions of a particular city and its tourism potential. Over time, such properties can become a weighty alternative to the rental segment, but with additional benefits and great investment potential," the expert says.

Sementsov notes that the service apartments imply not only creating comfortable and convenient apartments for living, but also a full range of useful "services" for the tenant:

lobby with reception,
coffee shops and recreation areas,
room service,
cleaning,
convenient paying for utility bills.

According to him, the amount of investment in creating comfort-class service apartments for 100-150 apartments with their own managing company in the live-work-play format (with cafes, fitness centers, shops, small shopping centers, coworking spaces, etc.) can cost the developer at least $6-8 million, which is 25-30% more than constructing a residential complex of the same category.

"A service apartment project realization is significantly more expensive than housing construction. However, the main advantage of this project is a constant profit immediately after commissioning the property, which is not the case in most new buildings where the investors have to do repairs and furnish the flats in order to begin earning profits," he stresses.

According to him, about a dozen projects of service apartments are currently being realized in Ukraine, mainly in the format of commercial apartment buildings and apart-hotels. However, in the next 2-3 years, their number may increase by at least 1.5 times.