LONDON—The advantages to developers and operators of having a brand attached to the residential component of a resort hotel are numerous, but the brand must be chosen carefully, experts said.
“Fit the brand to the market, not the other way around,” said Russell Bragg, founder of property development firm Bragg & Company.
Speaking at the Leisure Real Estate & Vacation Rental Conference this month during a session titled “Branded hotels and resort residences,” Bragg and fellow panelists said the pluses to attaching a brand to residences include:
- Developers are able to generate cash flow more quickly and profitably;
- branded operators are able to expand with new sources of management revenues and royalties; and
- private owners have a long-term investment opportunity with the possibility of rental income.
The market for branded hotel and resort residences has rebounded relatively well over the past couple of years, panelists agreed.
Philip Bacon, an analyst at Horwath HTL Spain, said branded residences are here to stay. The offerings constitute revenue.
“But these are generic statements. A winning strategy requires knowing your market and working within a designed time frame,” Bacon added.
Branding is one avenue in which alternative real estate can be marketed, said Margreet Papamichael, director of design, construction financing and advisory firm AECOM Economics. The key is, she added, it’s all about timing and cash flows.
It is also about an expectation of quality and service, said Valentin Sadan, director of development, Europe, at FRHI Hotels & Resorts, which is owned by Qatar’s sovereign wealth fund Katara.
“Residences can mean villas, apartments and mansion, but all will be associated with the brand and its services, and that requires the same level of quality and experience,” Sadan said.
Bacon agreed the guest has an idea of what that brand expectation is, but from the developers’ viewpoint, collaboration could be troublesome.
“It’s a mixed bag. Brands can be a pain,” he added.
Brand candidness
Whether the brand acts as a leg up to the residential portion, or vice-versa, or whether they walk in step with one another or at difference stages of each portion’s development, is the main question all parties have to understand and strategize, panelists said.
“Phasing the resort’s development is an amazingly robust tool. Initially, branding is the way, but subsequent phases do not have to have that same level of branding, or any at all. If you set it up correctly, you can develop your own brand at the same time you are working with the hotel brand,” Papamichael said.
“Nevertheless, it is awkward, because that might not be the way the developer envisages the scenario to play out over the lifespan of the product. The ratio between guestrooms and residences depends on how you integrate the two products. You can always add on; it’s more difficult to subtract,” Bacon said.
“And from the hotel viewpoint, there is a sweet spot, as you would leverage hotel services to the residences, so you would not want too many of the latter. That’s not a hard rule, but relatively speaking, the idea is always to have more transient business than residential,” Sadan said.
Numbers game
The different focuses that come with branded residences—developers and asset managers wishing to create cash flow from residences fairly immediately and a rental income over time to operators looking at hotel metrics and fee revenue—can inevitably lead to conflict.
“The starting point has to be a holistic vote of the development. We would start with a hotel hat on and then look at residential opportunities after we have seen we have the right scale,” Sadan said.
“We’d also look at the balance between guestrooms and residences in each local market. What, for instance, would you do if the residences are working well but the hotel in five years fails? There are two very different dynamics,” Sadan added.
Failure often comes when the hotel is seen as marketing for the residences, Papamichael said.
“It is very tempting to go down this route, but you must be prepared to say that in any particular case a hotel would not work as part of the mix,” Papamichael said, who added that the secret is to ensure the right components are put in place to make the product sustainable.
“Having a story to tell certainly helps,” Bacon added.
Knowing the strengths each party brings to the table can be critical to success, which is borne out in the numbers.
“When we do comparative studies, there is a difference of 10%, maybe 15%, in price upside on branded residences, and absorption rate will be higher if there is more trust in the developer, which will come along if the brand is on board. Higher prices at a greater velocity will equal more money in the bank,” Papamichael said.
Destination and a willingness to carefully plan and see things through play important parts, too.
“In good locations 20% to 30% uplift is the norm, with the lower end being in London, the higher in Dubai (United Arab Emirates) and Hong Kong, but you have to also be aware of what will be the likely profits, as the brand will takes its cut off the bottom line, and that will be between 20% and 30%, too,” Bragg said.
“To deliver on the brand promise takes time, effort and resources. The trouble comes when people choose that they want a brand in from the offset, which initially helps sales, but the problems will come farther down the line. The message is to choose the right hotel in the first place and then choose the right brand,” Bragg added.