Branded residences command an average of around 30 per cent premium above comparable non-branded stock according to research. However, as pipelines expand new entrants continue to flood in, the question is: “At what point does the rapid influx of supply begin to undermine that premium and how can you ensure your project doesn’t fall victim to value erosion in the years to come?”
At first glance, there are few, if not no indications of strain when it comes early signs of premium compression amid strong momentum across markets, notes Paul Rosenberg, regional vice president – development – luxury, France, Southern Europe & North Africa at Accor. And the demand story as buyers rush to be a part of the “shiny new thing” is well documented, with increased buyer awareness, particularly around lifestyle, amenities and service only serving to reinforce the appeal.
The truth in plain sight
But beneath this exponential growth is a truth sitting in plain sight that the sector will have to face sooner or later: luxury is the contrary of scale.
“Luxury is about scarcity,” Rosenberg notes, adding, “Dubai and Miami are the largest branded residential markets in the world. While we’ve had the chance for a huge amount of branded residences in those markets, we realise that when you remove that scarcity, the prices drop. It’s important to keep an eye on that.”
Put simply, as more brands enter the space and as existing players push into new geographies, the very act of scaling risks undermining what made the model valuable in the first place.
For David Grossniklaus, CEO of Luxury Hospitality Advisory, the issue is less about whether premiums will disappear and more about who will continue to command them.
“We’re going to have different layers of those who are creating value because of the brand attachment and because they have been able to deliver the brand promise in the first place and then there will be those who may not able to sustain the delivery of the experience because for some of them, it’s more about profitability than the long term experience for the residents.” he says.
In other words, the era of “any brand equals a premium” won’t last long, and those with less focus on the long term will either disappear or see a drop in their brand equity.
Grossniklaus points to a familiar dynamic from the hotel sector. Brands that expand too quickly or partner with the wrong developers risk eroding their own equity. The same principle now applies to residential.
“If a brand is signing agreements with the wrong partners who are not maintaining the property to the right level, it has an impact on the end user and on the value,” he says.
The result is likely to be a widening gap between leaders and laggards, with only a subset of brands able to consistently justify pricing power.
Sustaining the premium
So if the premium is no longer guaranteed, then what sustains it?
For Laia Lahoz, chief assets and development officer at Minor Hotels, the answer is both simple and difficult to execute: consistency and proven long term staying power.
“You need a brand with a real story, a strong track record and real equity behind it,” she says.
But even the strongest brand cannot compensate for the wrong location, and operators are becoming increasingly selective about where they deploy branded residences, particularly at the luxury end.
“We review whether the destination is already consolidated in terms of luxury, We will not bring a luxury brand into a destination with low ADR that isn’t already getting luxury traction,” Lahoz explains.
That discipline is echoed across the market, with developers and operators alike paying closer attention to depth of demand, rather than just headline growth.
“It’s important to grow in the right places at the right time,” Rosenberg stresses.
Buyer perception
Turning to the buyer’s perception of value, amenities, programming, service delivery and even governance structures are all under greater scrutiny as today’s buyers are more informed and more demanding than a few years ago.
People aren’t just buying the name on the building. They’re buying the lifestyle, the amenities, the services. We sometimes have difficult discussions with developers because they weren’t planning for the level of amenities we require. But that’s what drives value,” Rosenberg says.
Grossniklaus also sees this as a critical dividing line.
“Some players will take shortcuts on finishes, on experience, on delivery. Those are the projects that will struggle when it comes to retaining positive perception over the long-term.”
Ultimately, the sustainability of any premium comes down to delivery. In co-located schemes, where residences sit alongside a hotel, that delivery is anchored in the operational strength of the hotel itself.
“Our mantra is that we need to provide the same level of service across the board,” Lahoz says.
Going back to Lahoz’s previous point, that consistency is essential, not just for guest satisfaction but for long-term asset value.
For now, branded residences remain firmly in growth mode. Demand is strong, pipelines are expanding and premiums continue to hold. But a time will come when the tone of the conversation will change from a relatively straight conversation of “brand equals premium” to a more conditional one dependent on brand strength, location discipline, operational delivery and long-term commitment. We’ve moved past the question of whether branded residences can command a premium and are heading towards the conversation of which ones will continue to sustain the strongest premiums.