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The Emergence of Service Apartment Industry and Its Future Prospects
(First Published in the month of Feb- 2008)

It is primarily the software industry and the BPO sector which cause large number of business travellers visiting Bangalore. By its very nature, Software industry is concentrated in a very small area where the infrastructure is available . The executives work in flexible work hours and it is important for them to live close to their work place. Thus there is a high demand for accommodation facilities where the IT companies are concentrated. Also, the highly paid professionals start investing on apartments, for best making use of tax benefit on Home loans. Thus growth in the IT sector catalyzed the growth in real estate sector. And Bangalore has a large number of apartments coming up in areas like Airport road, Koramangala, Indira Nagar, JP Nagar, Sarjapur Road, Hosur Road , Bannergatta Road and other IT areas. As most of the aparment builders start coming up with fully furnished apartments, Bangalore have a large number of ready to occupy fully furnished Luxury apartments.

Let us look at the statistics of the year 2005. About 50,000 to 1.25 lakh dwelling units were constructed during this period. 30 lakh sq. ft. of commercial space constructed in IT corridor. 350 major builders and over 1200 "other players" were involved in the construction of apartments. In 2004-05, 3.12 lakh documents were registered, yielding a revenue of Rs. 1,329 crores in Bangalore Urban district. [1]

Many apartments builders ventured into service apartments business and started providing extended stay accommodation. The success story of these big real estate builders group in service apartments industry in Bangalore is well known now.

The other side of the story is that when the high salaried professionals started investing on luxury apartments, they didnt have much idea how they would get tenants for these apartments. Most of those who invested in luxury apartments didnt want to live there as they bought these apartments for investment purpose and not for living purpose. But it was not easy for them to find the right tenants for these apartments as they were already paying high EMI and they want to find out the tentants who can actually pay the high monthly rental. And there is the issue of finding the reliable tenants. It will be highly risky to rent out once luxufy apartments as there are many cases where tenants could not pay rent and the house owners can not evict the tenants who default the rent paying, that easily. Those who have burnt their fingers are still cautious, especially at the thought of lengthy court proceedings. if a tenant refuses to vacate a house despite signing a leave and licence agreement, here people have no choice but do the rounds of courts. Most of the rights mentioned in the tenancy act, favour tenants over landlords. [2]So every one was looking for leasing their houses to corporates.

As a result of all these, the rate of revenue generated from rental apartments with respect to the property value started coming down in Bangalore. It is partly because the high growth rate in the property value in bangalore, but also, many apartments were lying vacant as most of the tenants of luxury apartments stay for relatively short period of time and then they move out, and the average occupancy of the luxury apartments started coming down, because there are more options available for the tentants now compared to past. With returns from rentals having come down drastically in recent years, managing property has turned out to be a tough challenge. [3]

When already there is a shortage in quality hotel rooms in Bangalore, and when there is a large number of furnished apartments available not having tenants, and the high demand for extended stay rental rooms (extended stay = anything which is two weeks or more), resulted Service apartments industry flourishing. In the metros 12-18 per cent of the hotel business is extended stay .[4]

Both builders and independant house owners, started setting up service apartments, either in partnership with others or independeantly. The number of service apartments went up from a few tens in early decade of the millenium to a few thousands by the later part of the decade.Those who started service apartments in the initial period made good profit, especially those who started service apartments in the Central Bangalore area like M.G.Road and Indira Nagar. The media and business world start discussing the prospects of this new business and any number of articles were published about the success of Servie apartments in Bangalore.

However the million dollar question is how long the success story of Bangalore service apartments last? Though, it is not widely reported many newly started service apartments failed to generate enough income and closed down, especially where there is high competition. Though some reports say 15,000 more hotel rooms are required in Bangalore [5] . [The first quarter of the fiscal year 2007 has seen drop in occupancy levels in Bangalore hotels. There has been a drop of 10-15 per cent in occupancy rates across city hotels. One of the reasons being MNCs cutting down on travel costs [6] [there has been a 20 per cent increase (about 450 rooms in five-star hotels) across hotels in Bangalore this year compared to last year, [7] Apart from high competition from service apartments themselves, there are other factors which are woking against the servicce apartments success story in bangalore.many software companies have started up their own servie apartments exclusively for their staff. And a large number of new small and medium sized hotels came up in Bangalore.

In addition to this, there are other not so pleasant signals coming up from the industry.

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References:
1 , 2 , 3 , 4 ,5 ,6 ,7



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