Brands alone will no longer command premiums in saturated markets

Brands generate the largest premiums in new destinations and emerging markets that have yet to see prime residential product of international standards. In mature markets, branded residences command a smaller premium, and recent evidence from New York suggests that branded schemes are actually trading at a discount to non-branded stock. Schemes such as 432 Park Avenue (unbranded) offer hotel-style services and amenities, and has successfully established itself as brand in its own right.

To differentiate from the competition, experiences rather than services will become an increasingly important factor. A pool, spa and concierge service are now a staple of any mid-to-high-end residential development and no longer enough.

In response, branded operators are setting their schemes apart by offering distinct brand experiences. Marriott International’s W hotels and residences have led the way in targeting the market for millennials (and their followers) and offer celebrity-chef restaurants, bars and nightclubs, attracting visitors and local residents alike. Six Senses focuses on health and wellness. Accor’s Orient Express residences will offer an extensive entertainment offer themed around the ‘art of travel’. Another Marriott International brand, Luxury Collection, emphasises location and the unique features of the property itself.

^{The Residences at the West Hollywood EDITION, Los Angeles, USA}

New brands will give hoteliers a run for their money

The branded residence sector is dominated by hotel brands, but others are making inroads. YOO is the largest single brand, car brands and fashion houses are in on the act, and other aspirational brands will follow suit.

Technology companies, already disrupting the car industry, may be a natural fit. They are innovative and have loyal customer bases. Luxury food and drink brands may be another contender, with potential to provide a distinct service offer to residents.

Guaranteed rental returns will come under greater scrutiny from regulators

Historically, many developers have offered guaranteed rental returns on branded residences. These were mandatory rental schemes whereby a developer offered owners guaranteed return for a fixed number of years. In a low interest rate environment, such schemes were a major selling point and cemented the sector’s popularity with investors.

While appealing, when these agreements expired, owners rarely benefited from the same levels of return (in many cases the developer built it into the sales price). Today, far fewer brands are comfortable with the risk exposure. Regulators are also taking notice. Legislation, first in the US and now the UK, classes these programmes as collective investment schemes, and subjects them to the same scrutiny as financial instruments.

As a consequence, such guarantees are no longer offered on projects in the US, and other markets are likely to follow suit. Agents are also now unable to promote such projects in these markets, even if they are outside the US or UK.

We fully expect to see guaranteed rental returns to adapt to this legislation as a result. The sale and leaseback model is being used as a workaround in some cases. The litmus test is: is the buyer purchasing a property or an income stream? Optional rental schemes appear to be the best model for the sector going forward.

Further information

Global Residential Development Consultancy