With so many branded residences projects I have been involved with — many with otherwise experienced developers in Dubai and elsewhere — the branded residences element of a project, its structure, governance and integration into the overall real estate development plan is often a “TBD” item.
This deferral inevitably negatively affects the ability to retain “alignment” of the respective participants — the developer, the brand and residence buyer — which inevitably changes over the life of the project as well as affects the property's operational efficiency.
One could write a book on the subject, but here are some of the key points which should be right in front of your nose to consider.
Have you done a market study regarding the potential buyers of branded residences, whether they are buying to invest or are people seeking a “community” to live in, their lifestyle demographics and pricing points, etc. Hopefully the potential brand will request such. The answers will have a bearing on the right brand and brand level you seek.
How experienced is the brand with residences? There is a well know adage in rhinoplasty: “Do your homework and get it right the first time as it can never be as good the second time.”
I am often reminded of this at various branded residential conferences where countless speakers, including myself, repeatedly reference foresight, upfront planning and detailed feasibility before undertaking a branded residential project.
Hotel brands have significant branded residential expertise and/or dedicated teams beyond their hotel development teams. And now with non-hospitality brands — such as fashion, automotive and sports — seeking to extend and monetize their brand to another sector, ask what expertise in serviced living do they have, and do they even have brand standards? With these entrants, the question must be asked “What is the brand promise and can they deliver?”
I don’t normally compliment the big hospitality brands, but — as with technical services in hotel developments — getting brand input on what does and does not work may be the most valuable “management services” you will receive from them, even after the the property opens. That said, be careful of international brand companies offering you a “wrong fit” brand because their more appropriate ones are territorially restricted. Remember, “net unit growth” and share price — not your project — is what drives them.
What is often overlooked are the legal and governance structures essential for the execution and operation of an efficient branded residential project. Does the project jurisdiction have sound mixed-use legislation, if any, or owners associations with various levels of potentially interfering control? Dubai, for example, has a third-party building manager intermediary, which creates frankly additional and convoluted documentation. The answer will affect the documentation drafting as well as how the various operational services are contracted and provided. Not investigating this upfront inevitably wastes time and money.
Most sophisticated brands will require the property developer to do a legal analyses. Others will want to do their own as well and then try and pass on the often significant legal costs to the developer. Arguably some early-stage discussion between the parties can produce a “cooperative” effort to arrive at the right structure without unnecessary duplication of costs.
Further upfront discussion of the broader project documentation regarding shared facilities, building management and rules and regulations for the residences is important to ensure the residences can be operated as the buyers intended. For example, in many jurisdictions, if the governing documents — not just the buyer's SPA — do not specifically prohibit short-term rentals via Airbnb/other intermediaries, there is nothing to stop a residence owner from regularly letting their unit to parties, etc. This is hardly the community environment retiree residential buyers thought they were getting into when buying a unit.
With mixed-use hotel and residence projects, leaving the planning of residences to later can negatively affect both the hotel and the residences. For example, I recently worked on a ultra-luxury 75-room hotel and 75-room villa project. During negotiations, the developer was not sure whether the residences would have a rental pool or not. On a niche project like this, the answer could materially affect the economic viability of the hotel if the residences are not included in hotel inventory. Also, the volume and accessibility of the amenities — pool, gym, back of house and other facilities — and their sufficiency to service each component is affected. Likewise, the buyer who paid a premium for a residential community environment where he knows his neighbor is not likely to be happy with a constantly changing rotation of next-door guests.
For those branded residential properties where the customer base supports a rental pool, how that pool is structured can further affect the operations. Will it be a net annual rental for use of the residence, a percentage of the fee from letting out the individual owner’s residence or a “pooled” sharing of the rental fees amongst all owners, or an after expenses net income allocation? And will the rental pool P&L be separate from that of the hotel? With the latter options, this can come to resemble a Greek “hydra” for developers and operators where multiple residence owners demand to look into the hotel books, question cost allocations between the hotel and the residences and why their unit was not let as much as others.
For standalone branded residential properties without a hotel — typically pitched more at buyers opting to reside in their property — it is less common to see rental pool options. But what one frequently encounters in standalone projects is an initial over offering of amenities — spa, café restaurant, other facilities — conducive to the sales process and premium, but which post-sale become a drag on the service charge. Brand standards are expensive and far less attractive when you have to service them on an annual basis. It is important to not “over egg” these facilities, or alternatively design and make them accessible to non-residential guests to prevent them being an albatross of service charge costs to the residence owners.
These are just some of the many upfront issues one needs to consider when planning a branded residential project. As noted, it is important to “have a nose” for these issues before undertaking the process.
Scott Antel is a hospitality lawyer with more than 25 years of experience specializing advising owners, developers and international operators in the Middle East, Russia/CIS, Africa, Turkey, Eastern Europe and the Caribbean on hotels, resorts, branded residential and mixed-use developments. He was formerly a senior partner in DLA Piper and Bryan Cave Leighton Paisner. He established his own boutique hospitality practice, Scott’s FZ, in 2020.
This column is part of ISHC Global Insights, a partnership between CoStar News and the International Society of Hospitality Consultants.
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