What is a Branded Residential Development?

A Branded Residential Development (BRD) is a development:

1. which is affiliated with a Brand (either (i) a hospitality company such as Accor or Marriott, operating a BRD, or (ii) a non-hospitality brand, licensing its trademark to a Developer, to brand a BRD)
2. where unit owners pay a ‘base’ service charge for services and have the option to require ‘a-la-carte’ or optional services from the operator, and
3. where additional income can be generated if the unit participates in a rental programme.

The proliferation of BRD

The sector is poised for rapid growth, fuelled by its ‘win-win-win’ formula’ for Unit Owners, Developers and Brands. It demonstrated resilience during the pandemic and continues to attract high-net-worth buyers seeking a hassle-free, sustainable, experiential luxury lifestyle for their primary or secondary residences, by offering flexible spaces and integrated technology. Brands and Developers reap quicker sales and higher premiums from BRD compared to unbranded comparable property. Investor interest has also broadened to include institutional investors, sovereign wealth funds and individual developers, intensifying competition.

With BRD pushing boundaries in location and experience, differentiation has become more crucial than ever. Unit Purchasers seek brands that resonate with their lifestyle through unique design and immersive experiences, making brand selection critical.

A plethora of non-hospitality brands, such as Aston Martin, Fendi, and Nobu, have jumped on the BRD bandwagon, leveraging their brand equity alongside established hospitality giants like Four Seasons. The mid-market sector, in secondary locations, has seen exponential growth recently with consumers realising that they can benefit from hassle-free living without a luxury price tag. However, differentiation and tailored strategies are critical to stand out in an ever-increasing competitive market.

The three principal parties

Whilst a BRD is complex, and not without risk, at its core are three principal parties, who benefit from each other as follows:

(a)        The relationship between the Developer and the Brand results in:

• increased brand awareness and expansion; and
• additional income from ‘licence fees’ and ‘development services fees’.

(b)        The relationship between the Developer and each Unit Owner, results in:

• hassle-free ownership;
• the potential to generate income from a rental programme;
• if associated to a hotel, use of hotel amenities; and
• if a stand-alone BRD, additional income by renting out the unit.

(c)        Branding results in the following

(i) To the Developer:

• a proven ‘uplift’ in sale price for each unit;
• differentiation in an increasingly competitive market; and
• potentially assists obtaining planning permission/zoning if a hotel is required.

(ii) To the Unit Owner:

• prestige and luxury lifestyle associated with the Brand, so-called ‘trophy-status’;
• enhanced property value as BRDs are limited in supply; and
• certainty in quality of finishes and the level of services provided to Brand Standards.

(d) With Unit Owners purchasing units in BRD, this results in the following:

(i) To the Developer:

• the development can be monetised at an early stage and with greater velocity, realising cash flow from unit sales when:
  o legal agreements with the Brand are exchanged; and
  o sales and marketing strategy and collateral is ready.

(ii) To the Brand:

• additional income from service charges and rental programmes (if applicable); and
• the units could form potential additional inventory where the BRD is associated to a hotel.

Typical structures

1. Hotel with Serviced Branded Residential (no rental programme)

The Brand operating the hotel also operates the BRD. Unit Purchasers are attracted to the idea of living in a space with access to hotel amenities, which can accommodate friends and family. Unit Owners will likely be restricted from letting their units on a short-term basis to avoid competition with the hotel.

2. Hotel with Rented Branded Residential Units with either ‘Mandatory Participation’ or ‘Non-Mandatory Participation’ in a rental programme

Subject to compliance with local law (rental schemes are a Collective Investment Scheme in some jurisdictions, e.g. the UK, coming under the Financial Conduct Authority), Unit Owners and Brands benefit from rental income generated from a managed rental programme. Rental income can be (i) pooled, which is more appropriate for BRDs where all units are of similar value, (ii) guaranteed by Developers which positively impacts the sale price, and/or (iii) mandatory – common where smaller hotels rely on BRD units to boost their hotel inventory. Unit Purchasers find rental programmes appealing as they generate income and capital growth, cover annual running costs, and ideally generate a surplus.

3. Serviced Stand-alone BRD (no hotel) – either a ‘Mandatory’ or ‘Non-Mandatory’ Participation in a rental programme

With hotels taking an average of 3 to 4 years to stabilise and the rising cost of debt, standalone BRD are proliferating the market, especially in mature urban locations, presenting huge opportunities as existing buildings in A+ locations can be converted without a hotel, also reducing embodied carbon.

This space had been dominated by non-hospitality brands; however, international hospitality giants have recently moved into this space, giving Unit Residents the same amenities and services which would ordinarily be found in a hotel.

Selecting the right Brand, amenities and structure

In a post-pandemic world, people have changed the way they live, demanding wellness amenities, entertainment, more interior and exterior space and facilities, enabling digital nomads to work from their primary or secondary homes. The right Brand gives potential Unit Purchasers confidence that the BRD will meet a specific quality and provide amenities and standards of services that they require.

A significant differentiator is curating access to services and facilities which ensure harmony with the Brand which will appeal to potential Unit Purchasers. Will a service or amenity fall into the ‘base services’ (e.g. 24-hour concierge, security, smart homes, access to exterior spaces and wellness facilities) or ‘à la carte’ services (e.g. the availability of Michelin-starred in-room dining, access to golf simulators and entertainment areas)? Establishing the most appropriate services and amenities are crucial to drive the price premium.

The optimum time for a developer to engage with one or more potential Brand partners to determine ‘is this Brand right for this market’ is upon conceptualisation and:

• identification of a funding strategy;
• assessment of the legal landscape; and
• analysis of an independent market feasibility report to determine the target market and their investment motivation (whether to implement a rental programme and if so, how best to optimise it) and pricing.

Brands are also selective of their development partners, being wary of how easy it is for their brand to be tarnished by inexperienced developers, especially those considering a scheme in a ‘poor’ location or whose focus is only on exit.

Ultimately, early collaboration and alignment between the Brand, the Developer and its Consultants is essential to ensure that the BRD not only meets brand standards but also meets each party’s ambitions and vision.

If you have questions or concerns about BRD, please contact Nadia Milligan.