Article about Branded Residences at Hosteltur
We would like to share with you the English translation of this interesting article published by Hosteltur about Branded Residences, written by Vivi Hinojosa and perfectly explained by Jesús Rodríguez Maseda.
We recommend reading it!
Here, the English translation
Keys to the hotel-investor-developer relationship, according to Jesús Rodríguez Maseda, of Savills
Branded residences, a booming product to make investment more profitable
Hospitality branded residences assets are linked to hotel operations
December 12, 2023
Owners of branded residences have access to both benefits and services, both privately and in a resort environment. The owner cannot “opt out” of the program, choose the operator, modify the terms of the contract or select the management model.
It is essential that branded residences generate added value, meeting the expectations of the developer, operator and buyer.
Branded residences, or luxury residences with a brand, are “in fashion”, consolidating themselves as “a tool to increase the profitability of the investment”, as defined by Jesús Rodríguez Maseda, director of Strategic Hotel Consultancy at Savills and an expert who has distinguished up to five typologies, arriving at the “Hospitality branded residences”, as long as they are part of the “rental pool”, as the only tourist product within this type of offer.
The so-called “Hospitality branded residences” are, in the words of Jesús Rodríguez Maseda, “an investment product with a reservation of use for the property, the duration of which is subject to the legislation of the destination. In Spain, the usual limit of use is 60 days a year. In this model, the asset becomes part of the hotel’s inventory for the remaining time, being marketed by the hotel operator as another unit of the resort/hotel. These units are treated the same as any other room in the establishment, with access to all the services included in the reservation.
Branded residences, a booming product to make investment more profitable
Mandarin Oriental announced last May that 30 luxury residences would make up the Mandarin Oriental Residences Madrid. Source: Mandarin Oriental.
Operationally, as the expert added, “they are an extension of the hotel inventory that allows the operator to increase it, both from the point of view of volume and from the point of view of expanding the mix of typologies. We can find them annexed in the same building or in other areas, such as in the form of independent units, apartment complexes or villas, among others”.
From the financial point of view, “they are a tool that allows us to increase the profitability of the investment in two ways, as well as to minimize the risk with the help of the operating brand”.
Four basic axes
Branded residences, as Rodríguez Maseda explains, “revolve around four basic axes:
Land: according to Spanish legislation, this type of asset can only be promoted on land that is suitable for tourist use. Otherwise, the real estate assets would be strictly for residential use and could not be incorporated into the hotel’s rental pool.
Use: Spanish legislation also establishes that this type of asset may be reserved for the property for a maximum of 60 days per year, and must be available for hotel use for no less than 305 days. The formula under which the owner’s times of use will be established will be an agreement between the operating brand and each of the owners.
The investment, directly tied to two vectors: the hotel operation and the agreement between operator and owner about the moments of enjoyment of the property, which will mark the theoretical profitability. The first of these is an aspect to be resolved over time, as it is an investment that involves hotel operational risk. Due to the type of assets, normally linked to top-level brands and in prime locations, the contracts are subject to management models, which means that profitability is never guaranteed.
The return: given that establishing the purchase price is more complex than the conventional one, the return on investment offered by the operator -even if only theoretically- is one of the drivers when determining the viability of this complement to the hotel”.
“There are three parties that have to achieve their objectives: the developer, through the sale and the hotel’s return; the operator with the management; and the final investor through his time of enjoyment and the profitability offered by the manager (vs. the sale price set by the developer),” explained Jesús Rodríguez Maseda.
Branded residences in urban and holiday homes
In the urban sector, as the expert pointed out, “the component is purely real estate. Thanks to its absolutely unbeatable location, it takes advantage of a price per square meter that is difficult to improve, which can be boosted through the price premium offered by an ultra-luxury brand”.
Other news about this type of product:
– Branded residences will triple their supply in Spain in four years.
– Branded luxury residences and hotel services, a booming business
– Salomon 1965 and Majestic Hotel grow in Seville
– Mandarin Oriental hotel chain to have luxury residences in Madrid
– Banyan Tree Group enters Spain through the real estate company La Quinta
On the other hand, “in locations with a more marked vacation component, the developer decides to develop this type of complements to the hotel asset for two main reasons:
Use of available buildable land that is not exhausted through conventional development. One of the options is that the land, once a feasibility and sensitivity analysis has been carried out, offers remaining buildability and it is necessary to look for a complement that consumes it, mitigating the risk and offering a way of extraordinary profitability.
Financial solution for the project. Branded residences offer a kind of anticipated income that, in certain situations, can act as a supplement to the project’s own financial resources or to the financing of the project itself”.
Satisfying the developer, operator and end buyer
Rodríguez Maseda insists that in order to be successful, “it is essential that branded residences generate added value, meeting the expectations of the developer, operator and end buyer. Each has its own objectives and interests, so if the project does not meet any of them, it may not be viable.
The developer, as he points out, “aims to make the project profitable and achieve the maximum return with the minimum possible risk. He is therefore interested in the hotel operation offering the highest possible profitability so that, by capitalizing on the potential benefits of the branded residences, the sale price allows a comfortable profit margin”.
At the same time, “this complement must be operationally feasible”, i.e. “viable from the hotel operation’s point of view. On many occasions we find that developers see these residences as a lever to make their projects financially viable, and they design products that are not attractive to those brands and operators that would really help to achieve this objective. This happens because of an oversizing with respect to the main hotel, either because of a dispersion in space that makes the operation inefficient, or because financial necessity pushes to put on the market products that do not fit the demand in its different angles: hotel, investment and, sometimes, both together”.
Finally, as he added, “it has to be an attractive product for the market. There are certain brands with traction capacity and great loyalty from their clients and investors, who are capable of attracting them to any type of destination, creating a market by themselves. But these are the least common cases and the range of brands is highly limited. That is why these products have to be developed in destinations that meet certain requirements:
A real estate market that is a driving force, permeable and with a medium-high segment demand and, preferably, with a high active impact.
A destination with a high-level hotel inventory, either with or without the presence of international brands, but where this type of tourist feels attracted despite the fact that the hotels on offer may not meet their expectations.
Infrastructures that accompany the project. Connectivity is key when it comes to developing this type of product, since they are second, third or fourth residences and have such a limited and specific time for their use and enjoyment.
“We can only talk about branded residences from a hotel point of view when they are assets that can be acquired on land for tertiary use, in developments that are based around a hotel establishment and which, if we are owners in Spain, we can enjoy for a maximum of 60 days a year,” concluded Jesús Rodríguez Maseda.