For most people, getting a mortgage is the biggest financial commitment they’ll ever make.
Buying a home is always a bit of a gamble, but would you feel better about it if the property was endorsed by your favourite hotel brand? Branded residences are homes that are developed and marketed by some of the world’s biggest hospitality firms from Four Seasons to Mandarin Oriental to Marriott. They’re an increasingly essential part of a hotel group’s portfolio and there are even high net worth buyers who “collect” them.
If you’re European, this is probably news to you, but if you’re North American, it’s an established concept. Branded residences started up around a century ago in New York with the Sherry-Netherland Hotel on Fifth Avenue running its own serviced apartments alongside its existing building.
The Carlyle Hotel followed soon after, with its own private residences on Madison Avenue. The rest, as they say, is real estate history. The trend expanded out to Asia in the 1980s – Amanpuri in Thailand is thought to be the first such development there – but it’s only just taking off in Europe.
Savills says they pay, on average, 29 per cent more for a hotel branded residence than a non-branded one in Europe
According to research by Savills, 62 per cent of all city-based hotel residences are located in the US or Canada, while only eight per cent can be found in Europe. American hospitality brands also dominate the market, with Four Seasons and Ritz-Carlton owning 50 residences between them.
But this is rapidly changing. Four Seasons, fresh from completely refurbishing Ten Trinity Square overlooking Tower Bridge with a new hotel and residences, is about to launch its first standalone residential property development at 20 Grosvenor Square in Mayfair.
A report by international real estate expert Chris Graham says the number of hotels offering branded residences increased tenfold in Europe in the decade to 2012, with Dr Andrew Harrington at AHV Associates predicting they will become mainstream in Europe in the next five years. Since 2015, the number of hotel operators in the residential property business has increased by 27 per cent.
Clearly, building homes is an attractive proposition for hoteliers, but why? And how does it work? Generally speaking, these companies license their brand to property developers and charge them a royalty fee (generally about three to five per cent, according to HVS and Savills) but there are also associated marketing costs. They can then promote these properties to their customers and the developer has a ready buyer base.
Essentially, it’s an exercise in the power of branding. A survey by Savills International Development Consultancy (SIDC) showed that 68 per cent of clients thought the association of a project with an international hotel operator was “very important” when considering whether to buy into it, and none of them ticked the “not important” or “somewhat important” options.
Alexandros Moulas, associate director at SIDC, put it this way: “You have a Porsche that you love and you want to get it serviced. Would you trust the dealership you bought it from or someone who said they were a mechanic for the last 15 years, with their own garage? Would you go to that person or spend a bit more to go to the brand?”
In many cases, buyers are spending a lot more. Savills says they pay, on average, 29 per cent more for a hotel branded residence than a non-branded one in Europe. As always, though, it’s location, location, location. In global cities such as London and Paris, hotel-like concierges and spa facilities abound and are often provided by third parties, with the premium for these services around 10 to 12 per cent. In places like Dubai, where hotel operators are often the only provider of these luxuries, branded residences can be double the price of anything else on the market.
“Collecting these branded residences is an expensive sport,” says Moulas. Service charge is another way buyers can be stung. Moulas says he heard the service charge for a one bedroom apartment at a branded project in Switzerland was €40,000 a year.
For ultra high net worth buyers, though, peace of mind is priceless. Buying overseas can be complicated, so having help from a trusted brand that has experience doing business there is appealing. Leisure real estate specialist Paul MacSherry is quoted in the Graham Associates’ report as saying “brands provide buyers with perceived insulation against risk.”
“Perceived” is the key word here, as some branded projects have gone terribly wrong. Tiger Woods’ golf course and residences in Dubailand were put on hiatus during the recession and a Four Seasons project in Barbados made headlines after it fell through following the financial crash. It didn’t help that many of its buyers were celebrities.
Another factor that contributes to their popularity is the ease with which these brands can lease the units. The vast majority are put into mandatory or time-prescribed rental pools and take a share of the income. Yields are pretty encouraging, typically three to five per cent, and the hotel’s huge client database means you’re unlikely to have large amounts of time when the property is left empty, as you would with a regular buy-to-let. The rental income can also be used to pay off that extortionate service charge.
Savills’ survey suggests 60 per cent of purchasers expect their branded residence to be a good investment as well as a holiday home, compared to 36 per cent of the general residential market. “Broadly speaking, I’d say 20 per cent are investors, 40 per cent are investor/users, 15 to 20 per cent are user/investors and only about five to 10 per cent are lifestyle or ‘trophy’ home buyers,” says Moulas.
While Graham seems to suggest real estate sales could be beneficial to hotels caught in a difficult economic balancing act, others vehemently disagree. “The hotel component has to come before the real estate,” says Frederic Simon, CEO Asia at Commune Hotels and Resorts.
“It will not work if the hotel development is dependent on sales of the branded residences to finance the project. The destination, design ethos and quality of the development are essential to the partnership.”
But this scepticism doesn’t appear to hold up for Four Seasons’ first standalone residential development, nor other non-hotel luxury brands that have dipped their toes into housebuilding in recent years. Car brands are moving into the market fast.
Last year saw Porsche Design Tower open up on Sunny Isles Beach in Miami, a 60-storey skycraper with a special lift to carry supercars up to the penthouses. Aston Martin has residences nearby, while Mercedes-Benz chose London and Singapore for its first forays into property development.
Increasingly, big names in the fashion and design world are being drafted in to lend kudos to new homes. Yoo, a developer that has attracted names like Kelly Hoppen, Kate Moss and Jade Jagger to market its holiday homes, is part of a rising trend.
“Starchitects” are also being flaunted for the cause, such as at Daniel Libeskind’s Zlota 44 property in Warsaw or Zaha Hadid’s 520 West 28th building in New York. A Knight Frank report called Branded Residences’ says: “Design is a critical part of the creation of a brand. The use of well-known architects and interior designers not only increases the quality of the final product but also helps potential purchasers identify with the development.”
Is it so far out of reach, then, to consider Apple homes or Muji flats? Both are well-known for their design prowess and attract legions of loyal followers. “You’ve hit on the right word: loyalty,” says Moulas. “The people that buy the residences know the brand, from the experiences to the architecture to the services. All these factors add to the attraction. These brands are a stamp of trust and level of quality.”