The following article about branded residences was published in the Q3 edition of the International Luxury Hotel Association, highlighting the challenges and opportunities for hotel operators entering the residential sector.

The challenges and opportunities of developing branded residences for independent hotels

This article focuses on independent hoteliers’ challenges and opportunities when contemplating adding branded residences to their current business structure.

Significant brands already heavily invest in the residential market – backed by well-known brand promises and global support structures – listed below are some essential factors confronting non-branded hotel organisations.

To emphasise the economic power, the branded residences sector currently features over 55,000 apartments in 406 global schemes, served by over 70 hotel operators, and built in over 180 locations in 64 countries – with Marriott, Accor and Four Seasons accounting for over half of them. It is, therefore, very tempting for non-branded operators to jump on the bandwagon of residential property. Still, it pays dividends to ensure that the pros and cons of such an investment are thoroughly investigated to avoid a copycat situation that creates many problems.

At first glance, there are a lot of advantages to embarking on a branded residential project as an independent operator:

• Hotel development cash flow – selling residences off-plan to fund at practical completion via capital payments. Also, there is the potential for substantial management fees if you self-manage the project afterwards.

• Branded residences with hotel access command premium –recent studies by Knight Frank, Savills and Graham Associates (https://gagms.com/) all put the premium at around 30% by established branded residence operators compared to non-branded residences; however, huge fluctuations need to be acknowledged depending upon the location (i.e. -15% discount in NY to +60% in Bangkok).

• Avoid cyclical or seasonal variations – an occupied residence creates cash flow throughout the year via service charges and residential service consumption.

• Premium valuation of own brand – a successful project allows for heightened visibility of the hotel project and showcasing service excellence.

• Value-Cost benefit –residences can deliver higher values than average hotel accommodation on a per-square-foot capital value basis.

• Binding loyal customers even more – hotel services delivered at the same standard as well as maintenance & caretaking entice extra spending from loyal customers.

• Lock and Go piece of mind – customers enjoy carefree usage of their property, when in residence or not.

• Market differentiation – allows new prices, branding standards and services to be set to compete in complex or saturated markets. While this all sounds great and logical, if you don’t look behind the curtain, you might be in for a rude surprise, putting your customer’s goodwill and financial health at risk. One of the significant factors behind branded residences for hotels being so successful lies in their structure; they are part of a mature global operation and, due to their size in the portfolio, cash flow and reach, they are not only able to attract the required capital more efficiently but also have the operating knowledge as well as staffing expertise and service standards gained over years of experience.

Let’s have a look at what pain points you might experience when jumping onto the residential bandwagon:

• Cash flow –the cash-flow process is different here as you only receive monies after the apartment handover after a successful sale. Also, it would be best to account for expenditures such as one or two months of staffing cost, up-front insurance payment for the building, pre-opening operational equipment, etc., which can cause a strain.

• Residential marketing –with the market total of comparable units for sale, you need to consider how to differentiate yourself from your competitors regarding presentation, service and operations. You might only get five minutes to convince people of the services you can offer whilst they go through the traditional viewing experience, which is considerably less than in conventional hotel marketing. Professional marketing guidance is strongly recommended.

• Legal platform – I strongly recommend structured legal and sales advice before you start to guide you through homeownership rules, management agreements, leasehold contracts, service charge budgets, home association rules, building regulations, etc. You need to be aware of the building liabilities and warranties you have to back – some can elapse within 12 months, some only after ten years. Lastly, what will happen if you need to sell the hotel – what happens to your residential services?

• Space Planning – it is very tempting to max out your available sellable space for storage, garage parking and other commercially attractive opportunities, but don’t forget that you might also have a team of service professionals who will live and breathe your mission and vision. If there are space constraints, you will hinder their efforts for years. This might lead to higher staff fluctuation, higher cost of operating the building – and eventually, erudition of the customer’s trust. It’s a false economy.

• Alignment with existing business – are you venturing into luxury branded residences or family-friendly offers? How do you plan to align both operations? This states the obvious: are you ready to have another 24/7 operation in addition to your hotel – with guests that technically never leave (which can create its dynamics!)? Are you still pursuing a residential addition to an existing hotel operation?

Knight Frank flags the entry of smaller hotels or even non-branded hospitality brands as a new trend to watch. Regarding marketing strategies, your customers want to be associated with your brand and partake in the benefits of your offering.

You will appeal to like-minded customers who want to live and socialise with others who share everyday things. The  residential market is still very competitive but offers substantial benefits. To thrive and survive, you have to ask yourself: what can I do better, and where can I be different from what the competition does?

Chris Graham from Graham Associates forecasts that many more 3- or 4-star operators will venture into the serviced apartment and branded residences markets, as they won’t be the sole domain of established luxury operators anymore.