As part of our series delving into the exciting topic of branded residences, and following on from our exploration of consumer demand last week, this week we’ll be analysing the performance of the branded residences segment, the impact of branding and what investors can expect in terms of returns.
Branded residences have established themselves as high-performing assets within the hospitality sector, positioning themselves as not just an enhancement to hotel operations but also as a model that delivers solid financial returns.
One of the most attractive features is the ability to monetise these assets quickly. Rather than waiting years for a hotel asset to stabilise, residences can be sold off more quickly, helping with cash flow.
“There is additional value to selling those assets earlier rather than waiting 3 to 5 years for a traditional full service hotel to stabilise. And if you generate enough yield for the owner, you can capture the cash flow via a rental pool, which provides additional opportunity,” says Nicholas Mellis, vice president of acquisitions and development at Highgate.
Branding: the key differentiator
But a key consideration when seeking to get the most bang for your buck is the brand attached to these residences. Branding plays a pivotal role in driving demand and enhancing the financial returns of these projects.
James Bland, director at BVA BDRC explains a brand serves as a mental shortcut for buyers, simplifying their decision-making process and adding perceived value and helping to command a higher price point.
However, he notes that while having a stronger hotel brand affiliation could translate into higher values, this premium is not guaranteed.
“You still do need to work at it and manage it properly. Simply slapping a brand on something won’t automatically make it better. But it is going to support and supercharge it if you're doing it right.”
And Mellis notes that the premium a strong brand commands on the residential side to be at least 15-20 percent, with higher premiums in less established markets. And Jeff Tisdall, chief business officer at Accor One Living agrees, going further to note that this figure could rise.
“Developers have found, measured by Savills, that the brand premium captured by investors worldwide when licensing third party brands for residential developments has exceeded 30 per cent,” he says.
He adds: “What we’ve observed over the years is that the most explosive brand premiums are in what we would generally regard as emerging luxury markets or secondary markets - such as Manila in the Philippines, Mexico City, Jakarta, Kuala Lumpur and Bangkok - as opposed to the ultra-prime capital city markets that are very mature.”
But how do you select the right brand?
Nicholas Mellis advises: “It’s two fold on both the hotel and the residential. On residential it is all about velocity and pricing premium. On the hotel it is about direct contribution. what demographic are they bringing to the table and what rate premium can they generate.”
Bland adds that when considering what brands to attach on your branded residences, location is a very important consideration. “This is because while there are brands that will work anywhere, if you want to get really high profits and super revenue, then the luxury brands for example in London are clearly going to have a higher price point as opposed to a mid-scale one somewhere in the provinces because there isn’t as much high-end demand.”
Benefits and challenges
There are a number of synergies to be found when co-locating hotel assets with branded residences, with Tisdall pointing out that these synergies enhance for investors, the economics of hotel investment. These synergies include an ability to share infrastructure between the hotel and residential components as well as shared amenities and services, which create cost efficiencies.
In resort markets, rental programs for branded residences, facilitated by global distribution systems and loyalty programs, offer further financial upside.
“These rental programs perform very well, especially when they provide the owner with a seamless solution so that they can transition very efficiently from periods of personal use to a period where it’s being rented out and then back again,” Tisdall says.
He adds that these rental programs perform typically at a premium relative to a traditional hotel room because the service and the experience is very similar to the hotel that they're co-located with but the accommodation is really that of a private residence, and so the rental guest has the benefits of not just staying private residence but taking advantage of the hotel’s services.
However, branded residences are not without their challenges. The complexity of these developments - particularly in terms of aligning hotel and residential components as well as managing brand involvement - means costs can rise dramatically, Mellis warns.
The sector also needs to provide clear evidence of its commitment to sustainability, with Bland highlighting research which shows that people will pay more for a hotel/asset they perceive to be more sustainable than another.
He explains: “So if there were two identical hotels - certainly in the five star market and less so in the three star - and one of them is a bit more sustainable, then people are prepared to pay a little bit more or are more likely - at the same price - to choose the one that is more sustainable. On the whole, particularly in luxury where there's more disposable income, they do pay more and they’re becoming more discerning.”
Market outlook
Long-term, the outlook for branded residences is positive, with Mellis forecasting continued growth.
“I think that on the luxury side, it's going to be harder and harder to develop new luxury hotels especially in the gateway markets like New York or London where it's getting more and more expensive to build and labour is getting more challenging. The only way around this is adding residential and selling down your basis in the hotel,” he says.
As the sector evolves and competition intensifies, developers who can consistently deliver top-tier projects with an unwavering emphasis on real estate quality, facilities, service and design are expected to outperform.
Tisdall puts it perfectly. “It's critical that all the stakeholders in the project are grounded in the targeted buyer, understand who the buyer is and how they’re going to use the home, and design in a way that is purposely designed to resonate with them.
And when that is done effectively and in a disciplined fashion, that’s where we see the best performing projects in terms of achieving pricing – because they've been customized around a very specific set of buyer needs. And because it has been so carefully thought through and managed effectively, translates into very exciting results for our investment partners.”