In the final part of our series on branded residences, we’re discussing the investment and financing environment of this rapidly expanding asset class. To view the first three parts on: demand (part one), performance (part two) and supply (part three), please click the links.
Branded residences have attracted significant attention from investors and lenders in recent years, with the sector gaining popularity amongst a wide range of investors and lenders. Recent transactions underscore this growing popularity. For example, just last month, Related Group secured a $527 million construction loan from real estate private equity firm TYKO Capital for the St Regis Residences in Brickell, Miami. And earlier this year, Cain International secured $2 billion in financing -led by a $500 million senior loan from JP Morgan - for a 17.5-acre One Beverly Hills megaproject.
Investment appeal
“We’re seeing a diverse pool of investors showing interest in branded residences – there’s longer term capital, high net worth individuals, family offices, private equity,” says Henry Jackson, head of hotel agency at Knight Frank, explaining that branded residences were brought into sharper focus during the Covid-19 pandemic period due to their longer stay durations and stable income streams.
The asset class has proven to be relatively low-risk compared with traditional assets, with experts observing a shift towards businesses that aren’t so involved.
“People want businesses where there’s limited capex liability coming in because of the cost of capex at the moment and the costs associated with the refurbishment programs of more traditional hotel assets. Normally, branded residences are quite highly-specced, don’t need a heavy refurb and therefore essentially oven ready,” Jackson says.
Additionally, investors appreciate that branded residences offer a quicker return on investment as opposed to waiting for a more traditional hotel asset to stabilise.
“Branded residences can be sold off really quickly and that’s really good news for investors because this means extra funding and money back in your pocket. For an investor looking for cash comfort, branded residences is the way to do it,” says Lee Lin, regional director, Asia Pacific at Nobu Hospitality.
Financing
While financing conditions can vary by market, branded residences remain an asset class that financial institutions are quite comfortable with, chief business officer at Accor One Living Jeff Tisdall says, with the global expansion of branded residences clearly not hindered by financial barriers.
“It is an asset class that is well supported by a wide array of credible advisory firms that can help development partners understand the potential for the project and the feasibility of the project. We certainly see variability from market to market in terms of conditions related to finance but based on the growth of the sector, that has not been a barrier to the very rapid expansion that has been witnessed over the last decade but and we see continuing into the future,” he says.
Furthermore, he notes that the benefit of the shared infrastructure and services between mixed hotel and branded residence assets, reduced overhead costs and creates a synergy which makes investment more attractive to both developers and lenders.
Turning to pricing, Jackson thinks the biggest factor is capex, with properties requiring significant refurbishment or capital expenditure likely to see reduced values compared with those who don’t, adding that the scale of the assets is also a consideration.
“Do the assets need capex/refurbishment? How are they performing against their competitor set? And then there’s scale – are they large and are there enough rooms there to bring in a bigger institutional investor? As soon as you get into that higher room count, it’s likely that there’ll be a wider buyer pool and therefore, that drives value,” he says.
He adds: “Investment interest for branded residences is down to the size of the assets – for example, in the UK, branded residences in Edinburgh, Manchester, London and potentially Birmingham will be key targets. “
Furthermore, branded residences benefit from a longer average stay and reduced service requirements, which can lead to sharper yields compared to traditional hotels.
“With branded residences, the approach will be taken on the basis that because the stay is longer, there’s less service required. And effectively if you have longer stays, then there’s potentially less risk. So there might actually be a sharpening in yield on the basis of a serviced apartment operation compared to a traditional hotel, with yield dependent on the asset and its location.”
Looking to the future
The future looks bright for branded residences, and while it’s still a fragmented sector, there’s growing weight behind it as institutional investors begin to want these assets in their portfolios.
Jackson explains: “These investors may be invested into the private rental sector and therefore they’ve got their allocation on PRS and may see this as a next move. It’s a midway point into owning a full-service hotel where the risk is probably greater.”
He adds: “People are attracted to this type of business with less risk profile, longer stay and higher profit conversion. I think it’s an exciting market coming through and we may see more branded residences in the next few years whether that’s conversion or new-build development.”
Branded residences offer a compelling combination of lower risk, higher returns and high pricing potential. The sector’s growth coupled with increasing interest from investors, developers, lenders and other stakeholders will ensure that branded residences will continue to be a key focus for years to come.