Branded residential development powers on, with new developments globally, now often occurring beyond the traditional “gateway” cities.
In Dubai — today the brand residential capital of the world — and in other major markets, branded residential some time ago expanded beyond the traditional mixed-use development associated with — and using as an upfront financing tool to develop — an adjoining luxury brand hotel, to the launch of numerous “stand-alone” residence-only developments.
Sensing the opportunity to leverage the cache of their brands to a new market sector, others outside the traditional luxury hotel brands have piled on. Initially fashion and jewelry brands (e.g., Armani, Bulgari) partnered with an experienced hotel operator, but more recently, others in the automotive (Ferrari, Bugatti), restaurant (Nobu), cinema (Paramount), sporting world (Greg Norman) and others have entered the sector, often promoting the brand but without any association with a traditional hotelier to manage the residence experience.
Additionally, the hotel brands have expanded their branded residential offering to non-luxury and midscale or lifestyle brands (25 Hours, Moxy, Rove).
In previous articles, we discussed the — at least initially — “win/win/win” alignment of branded residential offerings for the respective developer, brand and residential buyer.
For the developer, there's a 20% to 50% sales premium with access to high quality design and layout expertise and brand prestige.
For the brand, they get to leverage the brand to a new customer and product. They also receive a nice 3% to 6% brand licensing fee on the residential sales price for a relatively nominal effort, with potential additional fees for managing the residences as well as providing a captive affluent audience for any ancillary hotel offerings in mixed-use projects.
Brands also no doubt get an opportunity to further exploit the operators' existing brands where territorial "non-compete" provisions in hotel agreements may prohibit further hotel brand expansion in a market. Yes, branded residential is typically excluded from such restrictions.
The residential buyer receives the status and prestige of buying and being associated with a luxury brand and lifestyle with higher standards of fit and design. There's generally greater assurances that what is promised in the sales brochure will be delivered and that the common areas, services, rules and regulations will be maintained and enforced. There's also a potential resale “premium” and “investment” element should the residence facility operate a rental pool program.
This sounds good, but the fast-paced expansion of branched residential development comes with upfront consideration, many of which have not been thought through for those new to the sector.
While one knows what to expect when buying a Fairmont or Four Seasons residence with their long history of providing luxury accommodation and services, what is the “brand promise” from these non-hotel brands, particularly those brands that have not teamed up with a renowned hotel operator to manage the residences?
Just an example: A recent billboard in central Dubai advertised “Fashion TV” Branded Residences. Can anyone guess what is the brand offering or promise? Daily lingerie and swimsuit runway shows through the lobby? That may indeed be appealing to a certain audience, but what is the deliverable and where is the connection of the brand to luxury living and service levels?
Then there is the legal and operational structure of branded residential projects. The reality is that very few — including very few international hotel operators — have much experience in the branded residential sector. And it often shows in their residential legal and governance documentation.
More often than not, documentation is rolled out that does not consider the local law elements relating to mixed-use projects and the presence, influence and control of owners associations, the absence thereof or some hybrid (e.g., Dubai) requirement where a third-party building manager assumes the role of the association.
Failure to account for this can impact the long-term sustainability of the branded project, particularly to the potential detriment of the brand operator and residential buyers who have paid a premium.
For stand-alone residences, the pedigree of the developer assumes greater importance to the brand, given that they want some form of “buffer” between the brand and the residential buyer/owner’s association with respect to construction defects, service charge defaults and other potential disputes. While less an issue with a mixed-use hotel and branded residential project where the developer remains in situ, for stand-alone projects, especially in less developed legal jurisdictions, operators will insist the developer stay in the game by retaining a certain amount of units or related “retail" space in the project.
This is in order to retain control of any owner’s association, ensure the brand standards and community rules are enforced, and to remain on the hook for any potential service charge shortfalls or building defects, especially in the initial years.
This retention requirement is often an unpleasant surprise for less experienced developers who want to build, sell and then take their money and run, but less so for those experienced developers who know that the medium- to long-term success of the project will carry over and value enhance any future projects they may do.
Stand-alone projects unassociated with a transient guest hotel also require a greater focus on creating a “community” environment. This can come in the form of greater attention to matching the brand and its associated lifestyle to the potential customer base, typically not having a rental pool in such projects, limiting any owner rentals to six- to 12-month minimums (and only through approved channels) and limiting residence common facilities to residence owners only and not the public. This is all done to better assure the lifestyle community that purchasers buy into.
Finally, a surprisingly neglected consideration — especially to residence buyers — is what if the brand “goes away,” quite possibly through no fault of the residence buyer? Maybe the developer defaults on the residence or associated hotel agreements, or the operator and developer decide they have “made their money” and no longer want to brand and manage the residences.
Reading the typical buyer sales and purchase agreement (which may not even mention the brand of residence you are buying), brand-mandated disclosure statement and other agreements closely, one sees that on paper residence buyers have very little recourse in such situations, despite having paid the considerable brand premium and quite reasonably having a expectation that the brand will remain with their property for the foreseeable future.
Just some of the many considerations with branded residential projects. But with the pace of the sector’s growth, unfortunately many of those developing, documenting, marketing and buying many of such projects have not thought it through for the long term.
Scott Antel is a lawyer specializing in hotels and hospitality in emerging, international markets.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.