The global branded residential sector continues to diversify and grow in both urban and resort markets. We are now seeing a new generation in the market for branded residences. Branded Residential 1.0 is largely the dominion of the luxury hospitality space, where a luxury hotel brand associates its brand with a residential project, co-located with the hotel. Branded Residential 2.0 moves beyond luxury to include a myriad of full-service, lifestyle, and select service brands with or without a co-located hotel to support the residential component. The qualitative broadening of the branded residential market and the shift to stand-alone branded residential are significant, resulting in an explosion in the range of brands lending their names to residential projects. Whereas BR 1.0 is limited to hotel brands, BR 2.0 includes fashion, automotive, jewellery, and other retail brands — brands not typically associated with hospitality. By some estimates, there are more than 200 different brands associated with branded residential projects around the world. To be clear, BR 2.0 has not replaced BR 1.0. Rather, both models are thriving in today's market and are expected to thrive well into the future.
Until the early 2000s, branded residential projects were only seen in the United States. Since then, however, branded residential projects have become a global reality, with destinations such as Dubai, London, Phuket, and Cabo San Lucas becoming some of the largest markets for branded residential projects. As new markets open up and existing markets deepen for both BR 1.0 and 2.0, what are the key considerations a real estate developer or investor should consider when selecting a brand? The following sets out our view:
Is the brand a fit for the project? Many considerations go into answering this question, including a clear understanding of how the design and location of the project and potential buyer pool fit with the ethos, aspirations, and operating model of the brand. When these factors are aligned, it improves the likelihood for success at both the 'sales table' and the 'operating table' of the project. If these factors are not aligned, challenges will likely arise across the entire life cycle of the project.
What is the price premium that will be achieved by association with the brand? After identifying a short list of brands that could be a fit for the project, and at the risk of being too reductive, it is then critical to develop a strong conviction that associating the project with a particular brand will yield a meaningful price premium to, amongst other reasons, offset the royalty fee payable to the brand as part of the sale of the residential units. Needless to say, the price premium contributes to the overall business case for undertaking the project — a threshold issue for real estate developers or investors. As recently noted by Marc Finney, head of hotels & resorts at Colliers, 'The price premium for branded residences can be significant. We have found the extent of the premium relates to several factors combined, including the hotel brand, design, location, range of services and exclusivity of the experience for residences'. Each of the brands under consideration should be in a position to provide hard data from other comparable projects to support their assertions of the premium that can be achieved by associating the project with their brand. This naturally leads to the next key consideration.
What is the experience of the brand with branded residential projects? As noted above, the more experience a particular brand has in the branded residential space, the more data it can provide on price premiums achieved at other projects in its portfolio. Beyond price premiums, however, branded residential projects — whether BR 1.0 or BR 2.0 — are complex at all phases of the life cycle, from the design and development phase, through the sales and marketing phase, and all the way through the operating phase. While an eye-catching, flashy, hip, and cool brand may seem like the right way to go even if the company behind the brand has limited experience in the branded residential space, the demonstrated expertise of the brand in all phases of the project needs to be considered:
- Can the brand provide meaningful and actionable support to
the design and development of the project?
- Will the brand be able to provide guidance to support the
market positioning and sales of the units with experienced
personnel well-versed in the marketing and sales of the brand's
residential projects directly in the market where the project is
located or in similar markets?
- Does the brand have the appropriate teams and infrastructure to manage and operate the project once it is completed and buyers move in?
This final point is a critical question and leads into the next key consideration.
What is the operating experience of the brand and the scope of services it will provide? In BR 2.0, the brand is just the brand in many cases; the developer or investor is left to identify an unrelated third party to actually manage and operate the project, beyond a short list of brand services that might be offered by the particular brand. This model stands in stark contrast to brands that over a period of decades have invested in and established teams and infrastructure to actually manage and operate all aspects of the residential project. This distinction should not be underestimated. Buyers of branded residential projects are generally a sophisticated and discerning group who will look beyond the 'brand on the door' in making their purchasing decision, seeking an understanding of how the brand will translate into the actual lived experience over a period of years or even decades. This more holistic evaluation of the brand and its offering is critical. It is in this space that brands with deep, demonstrated, and thriving management and operating experience across the entire life cycle of a project will improve the likelihood of success of the project, not only at the 'sales table' but also at the 'operating table'.
What are the fees and expenses of the brand? The primary fee a developer or investor will pay is a royalty fee associated with the sales and marketing of the branded residential project. These royalty fees generally range from 2% to 6% of the gross sales price of each residential unit. The variance in fees is a function of the location and qualitative level (mid-scale, luxury, or ultra-luxury) of the project as well as the overall maturity of the market where the project is located. Will the brand assist in the 'place making' of the location or provide a meaningful 'halo effect' to the overall area? If so, this will likely command a relatively higher royalty fee. If not, and if location of the project speaks for itself (e.g., London, Paris, or Rome), it will likely command a relatively lower royalty fee.
Whether the project sits within BR 1.0 or BR 2.0, the above considerations will sharpen the focus of developers and investors as they make the critical judgement of which brand to partner with for their particular branded residential project.
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