The branded residences sector is set for even more of a boom in the coming years as more brands – hospitality and consumer brands alike – get in on the action following a pandemic period which highlighted the benefits of branded residences.
Skyrocketing demand
Riyan Itani, director & founder of Global Branded Residences explains that while the performance of hotels and branded residences are linked to a certain extent, during the pandemic, while the hotel market suffered, branded residences continued to generate income as owners of existing branded residential projects continued to pay fees.
“Covid really showed the resilience of branded residences - that actually they performed really well whilst the core hotel wasn't performing well,” he says.
Chris Graham, managing director of branded residences consultancy Graham Associates notes that demand for these residences have skyrocketed as high net worth buyers recognized the benefits both from a lifestyle point of view as well as an investment point of view, adding that the market has been driven by the realisation by all parties involved – buyers, brands and developers – that there are significant profits to be realised.
One of these benefits, experts say, is the income-generation opportunity that comes from attaching branded residences to a new ongoing hotel development.
“When you're developing a residential product as part of the mixed-use development, you can collect sales proceeds and bring revenues forward. Your hotel won’t produce any revenue until it opens. And even then, it might require three to four years to stabilize, to perform at an optimum level. So where you have a residential component, you're monetizing your asset during the development stage,” says Rico Picenoni, head of global residential development consultancy with Savills.
“And where you have a certain permitted use where there are constraints on what you can build or a certain permissible development program, it may not make sense to develop 300 keys as a hotel, but it could very well make sense to do a 200-key hotel and 80 branded residences,” he adds.
Sellers puts it succinctly. “The more you diversify the property offering, the more you can mitigate risk but also diversify the income stream,” she says.
Key markets
Furthermore, Itani notes that certain units are being sold at astounding prices, especially those in markets where there aren't a lot of branded residences, as he also draws attention to the significant premium associated with branded residences in comparison with unbranded.
“Looking at the performance of sales of branded residential properties against non-branded properties, there are premiums at 70 per cent, 80 per cent and even 200 per cent, in one case. The premium associated with these sales is so significant compared to the cost incurred that it's a no brainer if you get great advice. If you're able to do that, then it's a fantastic business model.”
As a result, the number of projects in the pipeline has ballooned, not just in expected markets such as Dubai and New York but also around the Mediterranean and in London.
“The significant growth we’ve seen in recent years has carried over into the pipeline. We have over 600 schemes globally in the pipeline that are expected to be delivered by 2030, building off an existing almost 700. We’re seeing a lot of growth in resort and coastal locations,” Kelcie Sellers, associate at Savills notes.
“Geographically, Dubai is the most active market and thereafter, the east coast of the United States including Florida and New York,” Picenoni adds.
Sector challenges
However, the sector isn’t without its challenges, the biggest one being competition as branded residences continue to head into the mainstream.
But Graham advises that the key to tackling this is differentiation. “There are a huge number of brands all competing for the same dollar in different locations and they really have to stand out.
Differentiation has been the key message for the last few years i.e. how are brands going to differentiate one from another and attract the buyers? This will continue to be a challenge as more and more brands jump into the sector.”
He advises that for those looking to enter the sector, due diligence is key as well as appointing advisors with market-specific knowledge.
“Take good advice and listen to it because it de-risks the project. You need someone who has done it before, who understands the sector and who can specifically advise you in each particular market as there’s no cookie-cutter approach. Every project is different and you have to look at the individual characteristics for each project,” Graham says.
He also stresses the need for the chosen brand to appeal to a large audience.
“Given that over 80 per cent of the branded residences are affiliated to a hotel or hospitality brand, naturally, there is a very close tie between the operation of the hotel and the residences. The brand needs to appeal to a big market. There should also be a constant flow of hotel guests because it is those hotel guests that are going to going to rent many of the residential properties.”
Another challenge, Itani notes, is funding for development as the current interest rate environment has made investors more cautious. However, he expresses belief that 2024 should see this alleviated.
And of course, sustainability and eco-friendliness are key considerations in relation to the development of branded residences.
“I've seen commitment from some developers and indeed some financiers insisting that they have to be sustainable and very eco-friendly,” Graham says, adding, “Consumers are also increasingly actively looking for more sustainable solutions for their vacations and this trend will continue. Developers are going to have to show their sustainability credentials.”
Itani agrees. “The brands themselves are asking developers to up their game in terms of ESG credentials. They want to see that the developers that they partner up with have thought about ESG principles. So it's definitely on the agenda but as ever with ESG and environmental considerations, it's a bit of a slow burn.”
While market saturation is an issue to a certain extent – with most concerns around that being in markets like Dubai – Itani assures there’s a long way to go before it becomes a concern in most markets.
Investor profiles
Turning to the profile of investors interested in branded residences, this has expanded hugely, growing from being primarily the domain of private equity companies.
Itani says: “I'm seeing good old fashioned property developers wanting to talk about branded residences. Large institutional investors like private equity and sovereign wealth funds are still the majority of the market but individual developers are now understanding that getting into a brand partnership can really change their building’s profile and its performance.”
Looking ahead, experts say that beyond 2024, they expect to see more standalone units where there are no hotels attached to residences.
And it seems that they won’t just be the reserve of the luxury sector, with upscale brands and even mid-scale brands entering the market, with the trend expected to continue.
“We are witnessing an increasing number of upper upscale brands and upscale brands and in some cases, mid-scale brands that are entering the space right now,” Picenoni says, with Sellers noting that for 2023, 23 per cent of the total completed supply of branded residences was upper upscale, with 7 per cent being upscale.”
Graham agrees, adding: “We are now seeing the emergence of upper upscale and upscale brands, with big operators like Marriott and Accor and Wyndham all expanding down from luxury as the further down the pyramid you come, the bigger your target audience and potential buyers.”
Experts also add that the number of brands that enter the market will continue to increase and will include both hospitality i.e. hotel brands and fashion brands i.e. the likes of Missoni, Fendi, Versace, and Armani.
“Restaurants, automotive brands and other are all jumping onto what I call the brand wagon. We've seen publications such as Sports Illustrated, Elle Magazine, Conde Nast getting in on this, with Elle launching a hotel in Paris. We've seen restaurants such as Nobu and Hard Rock coming in. This is going to continue to be a trend so we're going to see the sector expand,” Graham says.
The experts agree that supply and pipeline will continue to grow in more regions around the world, with Graham noting that while Europe was a slow starter, there has been “phenomenal growth” in London, Madrid, Barcelona and other major European cities.
Itani adds: “In Madrid, although the brands haven’t been announced yet, there’s set to be another three branded residential projects due to come forward in the next five years on top of the two that are already in existence. There's some talk about Paris, and I know one particular brand that is currently looking at a building in Paris.”
In the US, Miami and New York have been spotlighted as cities emerging as hotspots.
All in all, it seems the branded residences sector is poised for substantial growth as it presents a lucrative business model that appeals to a wide range of investors, developers and buyers. However, challenges such as increased competition, the need for differentiation, sustainability considerations, and changing economic conditions must be navigated.