LIFT Reviews Key Themes and Trends from HICAP Update 2012

HICAP Update 2012 was held this week in Singapore, bringing together leading hotel investors and operators from across Asia Pacific. At LIFT, we were energized by the two-day event and noted the following themes and trends.

1.   Mixed use developments continue to play a crucial role.

2.   Sri Lanka generates significant enthusiasm amongst investors and operators.

3.   Strong performance of Singapore market expected to continue.

4.   Asia continues to be a hotbed for hospitality brand innovation

5.   Debt markets have tightened

1. Mixed Use Developments Continue to Play a Crucial Role.

Key takeaways include:

·      Francis Killory of the Jumeirah Group sees renewed interest in mega mixed-use developments in Asia, and highlights Singapore as a preferred market for such undertakings.

·      SilverNeedle Hospitality continues to view residential components as essential elements of their developments.

·      In China, Allen Matis of SilverNeedle notes that planning permission granted to residential developers often requires a hospitality component, but that general commoditization of the residential segment in China leaves Beijing and Shanghai as the only potentially viable markets for true “branded residential”.

·      James Simmonds of New World Hospitality suggests their Rosewood brand will be extended to “select” residential components of mixed-use developments in Asia. Like several other leaders in this space, their key is to position a Rosewood-branded residential offering as a lifestyle product and to avoid projects where investment returns will be implied or guaranteed.

2. Sri Lanka Generates Significant Enthusiasm Amongst Investors and Operators.

Key takeaways include:

·      Benefits of “peace dividend” continue to be felt in a market that offers cultural diversity, natural attractions, health and wellness.

·      5-star ADR has doubled since 2008 to USD $125.

·      While most offshore investors are entering Sri Lanka via JV’s with local partners, 100% foreign ownership is permissible.

·      100% repatriation of profits is also possible.

·      Foreign investment regulations are therefore supportive of mixed-used developments with residential components as it enables residential units to be acquired on a freehold basis by a local corporate entity. A foreign national or offshore company may own 100% of associated shares, and rental income can be repatriated.

·      Currently the market is polarized with entry-level backpacker accommodations at one end of spectrum and limited supply of ultra luxury at the other.

·      The Sri Lankan government looks to increase tourist arrivals from a modest 0.85M per annum in 2011 to 2.5M in 5 years*.

·      To achieve this, it is estimated an additional 50,000 hotel rooms will be required*.

·      SilverNeedle Hospitality has recently acquired land in Sri Lanka, while Minor International has opened an Avani Kalutara Resort and is about to break ground on a project which will carry its flagship Anantara brand.

·      Institutional capital seems to be taking a “wait and see” approach, while private capital takes the lead.

·      Regional operators like Hirin Cooray’s Jetwing currently dominate the market, while Starwood and other international groups are taking steps to strengthen their position.

* Source: SLTDA Annual Report, HVS.

3. Strong Performance of Singapore Market Expected to Continue.

Key takeaways include:

·      Extremely limited supply of hotel rooms in outlying commercial centres – as Paul Logan of IHG commented “there is demand for accommodation outside of the city centre” which is currently unmet.

·      Unmatched combination of urban/master planning, infrastructure, amenities and attractions, as well as Singapore’s status as a centre of wealth management.

·      Greenfield projects are likely to serve as the preferred strategy for new entrants and investors looking for more exposure to Singapore, as acquisition costs currently exceed replacement costs.

4. Asia Continues to be a Hotbed for Hospitality Brand Innovation.

Key takeaways include:

·      industry veteran Marc Dardenne used HICAP Update, in his capacity as CEO of Patina Hotels and Resorts, to help launch the exciting new Singapore-based luxury brand.

·      Patina Hotels and Resorts strategy focuses on development opportunities in Asia Pacific and Europe, and Dardenne identifies an intriguing “window of opportunity” in the United States (based on current valuations).

5. Debt Markets have Tightened.

Key takeaways include:

·      General sentiment was that debt markets have tightened substantively.

·      Allen Matis noted that a non-recourse loan requires “an act of god” at present.

·      Surya Jhunjhnuwala of the Hind Group of Companies generally concurred with observations regarding availability of senior debt, noting that project funding in Hong Kong has dropped from a 70% ratio to 40%. 

Strong Performance in Dubai Luxury Beachfront Hotel Segment Suggests Opportunity for Investors

We spend a lot of time speaking to hospitality investors about Dubai. For many, the Emirate is still seen through the lens of 2008. It is now more than three years since Dubai made international headlines for all the wrong reasons – a residential market collapse and sovereign debt issues. For those who have not been following the market closely, a review of current conditions is timely. Not only has the situation evolved significantly in three years – the hotel sector and in particular the luxury beach segment – has continued to thrive.

Certainly the residential market remains challenging. Supply from the construction boom continues to be an issue with Jones Lang Lasalle estimating another 18,000 residential units came on-line in the second half of 2011. Positively, constrained consumer lending conditions began to loosen in 2011 with financing surfacing for quality villa products in sought after communities. 

Another promising sign is anecdotal evidence suggesting multi-unit (bulk) residential transactions are being completed, as investors begin positioning themselves for a recovery. For those looking for signs that stability has returned, Nakheel, a Member of Dubai World, has reached agreement with 98% of its creditors and has announced the continuation of a couple of significant projects that were put on hold in 2008.

It is in travel and hospitality sectors where we see the most strength and continued strong underlying fundamentals. Despite the negative headlines that dominated 2008 and 2009, traffic through the Dubai International Airport experienced a compound annual growth rate (CAGR) of 13.3% from 2006 through 2010. Tourist arrivals increased by 10% in 2010 and likely advanced a further 17% in 2011 to exceed 8 million, according to Jones Lang Lasalle.

Not surprisingly, these trends are reflected in the recent performance of Dubai luxury beach hotels.  Occupancy in the segment grew from 71.8% in 2010 to 76.2% in 2011, according to STR Global. Average rate in 2011 increased to $403.92 USD in 2011 and REVPAR reached $307.71 USD.

There are a couple of important points to make here. Obviously, beachfront hotel performance is robust and and growth story remains intact.  While the segment has certainly benefitted from the safe haven status that Dubai has enjoyed as a result of the Arab Spring, strong underlying fundamentals continue to be an important part of the story. Beachfront hotel supply is surprisingly constrained in Dubai and a number of leading global luxury brands remain relegated to in-land locations.  It is not surprising then that remaining “tier 1” hotel development locations on the Crescent of Palm Jumeirah are once again attracting attention.

We see opportunities for investors on the Crescent where several mixed-use developments have been slowed down or stalled by the residential market correction. By injecting much needed capital into projects, investors can secure equity positions in very attractive hotel assets. The key is to find a project that is not saddled with excessive debt. While debt is an issue for many projects, there are some interesting exceptions.

Branded Residential Part 3: Future Opportunities

(Continued from Branded Residential "Brand Owner Perspective" Post on June 27th)

In recent posts we have taken an in-depth look at the branded residence business model – from both a developer and brand perspective. Today we will share a compelling set of opportunities we see to leverage current international market conditions.

Partnerships between Fashion or Lifestyle Brands and Professional Hotel Management Companies

Luxury hospitality brands have tended to dominate branded residential, as they have been best positioned to delivery the 5-star hotel services which many affluent consumers wish to see integrated into their residential experience. Yet there remain unmet needs in the residential space that could be well served by a fashion or lifestyle brand. The opportunity we see is for brands that speak clearly and credibly to consumer needs like sustainability, self-actualization and healthy living, to partner with hospitality management companies that specialize in developing “white labeled” hotel management solutions for leading hospitality brands. The right set of partners can translate exciting luxury brands into the residential space, and then ensure service delivery systematically backs up brand promises. When you think of the future of branded residential in these terms, there are many very exciting possibilities that emerge.

Secondary Asian Cities with Global Aspirations 

New York, Paris, London and Hong Kong are obvious choices for branded residential developments. However, a dynamic that really excites us is the growth of secondary cities in Asia. We see pent up demand in these markets for the quality residential products, amenities and brands that define global centers. Branded residences can be positioned to fulfill the aspirational element of this demand. In such circumstances a branded residential project can serve as a symbol of a city’s arrival on a world stage and a sign of its ascendency. The project becomes synonymous with a contemporary, cosmopolitan lifestyle that is now available. Of course, these same characteristics subtly apply to individual purchasers as well. Projects like the Raffles Residences Makati in Manila suggest that successful execution of this strategy can be very rewarding for developers.

Align Branding with Current Flow of Asian Residential Investment to Overseas Markets

Perceived property bubbles in Asia, strong currencies, portfolio diversification priorities and emigration strategies are driving individual Asian residential investors into markets like London, Sydney and Vancouver. We see a great opportunity in these markets to license brands that resonate strongly with both domestic and Asian residential purchasers. The highly successful and now complete Living Shangri-La, Vancouver project by Westbank and Peterson Group illustrates the potential. The mixed-use development includes 307 branded residences and its success has paved the way for a similar project in Toronto. We believe this success can be replicated by a number of Asian brands in urban markets favored by Asian residential buyers. Developers can lend further support to this strategy by establishing residential distribution in select Asian cities. A recent study by Landcor Data Corporation suggests the trend is accelerating and that an Asian distribution strategy should be given serious consideration by luxury residential developers. Landcor found that buyers from China accounted for 74% of 2010 luxury residence purchases (+$3M CND) in Vancouver, up from 46% in 2008.

Branding the Sales and Marketing Process 

The focus of those who license their brands to residential developers has been to ensure the physical product and service offering lives up to brand promises. By contrast, sales and marketing standards and the degree to which brand owners participate in developer-led sales efforts, varies widely. There is a great opportunity for brand owners to help create a branded sales process that includes global standards, a world class digital and print marketing toolset (including templates to support tactical execution), compelling storytelling tools and a consistent owner orientation process. By building a truly branded sales process, brand owners can further differentiate themselves and establish a “trusted brand” status in the residential category.

Meeting Residential Rental Distribution Requirements 

The demand for residential rental distribution is not going away, especially as capital appreciation slows in many markets. Developers who anticipate nightly rental occupancy requirements in design, and brands that can truly support residential rental distribution, will prosper.

We hope you have found our 4-part focus on branded residential to be helpful. LIFT partners with developers in the creation of world-class residential projects and supports leading hospitality and fashion brands as they build and operate branded residence business models. In our next post we will look at a closely related serviced apartment opportunity that is particularly relevant to markets in the Middle East, North Africa and Asia.

Branded Residential Part 2: The Brand Owner Perspective

(Continued from Branded Residential "Developer Perspective" Post on June 19, 2011)

The creation of residential brand extensions has provided hospitality and fashion leaders with a compelling new means of monetizing brand equity. It is a capital light business model in which third party developers license a luxury brand for their residential project, typically paying a one-time licensing fee that is calculated as a percentage of sales revenues and a lump sum technical services fee. As the brand owner often serves as manager of the resulting residential product, it also inherits an attractive recurring management fee stream (funded by residential purchasers).

The strategic value of a branded residential business extends well beyond immediate commercial returns. Residential design serves as an expansive canvas on which to tell and further develop “the brand experience”. Brand owners must define standards and translate style, tone, values and brand character to a residential environment. From foyer design to thread count, appliances, privacy considerations, outdoor living spaces, and service offerings, there are innumerable and novel dimensions on which to deliver against brand promises. While it is a complex endeavor, a residential product can serve as powerful expression of one’s brand, as evidenced by the ultra urban and contemporary Armani Residences which Emaar unveiled last April in Dubai.

The purchase of a branded residence can be interpreted as the ultimate expression of loyalty. After all, few consumer choices require greater commitment or say more about our preferences and individual style, than does the purchase of a private residence. For hospitality companies, residence owners are often viewed as members of the top tier of customer loyalty programs. The in-depth and long-term nature of residential management agreements enables hospitality brands to nurture a relationship with a very affluent clientele, who may emerge over time as true brand ambassadors.

The branded residence business model represents an exciting growth opportunity for luxury hospitality and fashion brands. However, the depth of the service offering requires careful consideration. Hospitality brands for their part typically do not brand residential projects unless they are operating a hotel within the same mixed-use development. The hotel provides the service infrastructure required to deliver the branded residential experience. Fashion brands must think carefully through service offerings that will be demanded in this space – delivery of concierge, butler, spa, housekeeping and reserve management services are frequent requirements. In tomorrow’s blog update we will consider future partnerships that may support the entry of luxury fashion brands.

While a private residence serves as a wonderful platform on which to tell one’s brand story, it also creates some interesting challenges from a brand management perspective. Given the level of detail involved in residential development, it is often more practical to rely on an approval process as opposed to explicitly defined brand specifications. Yet, this in turn leaves room for interpretation and can be a difficult process for brand owners and developers alike. Moreover, developers often outsource all or a portion of residential sales and marketing, and residential projects may be located in distant markets or time zones. This creates challenges for brand owners in terms of their ability to manage the use of the marketing assets they license to development partners.

Thinking through these considerations will help new entrants develop a business plan that is aligned with their brand and geographic footprint. In our next post, we will look at Future Branded Residence Opportunities.  

Branded Residential Part 1: The Developer Perspective

(Continued from Branded Residential Introductory Post on June 15, 2011)

From a developer’s perspective, the case for branded residential typically places significant emphasize on the incremental yield which the brand in question can bring to a project. Conventional wisdom holds that licensing a leading luxury hospitality or fashion brand can boast yield by 25% over similar “non-branded” products, and there is some good anecdotal evidence to support this.  In the summer of 2010 The Raffles Makati Residences set a record in Manila for the highest revenue per square metre achieved by a condominium product. The landmark sale occurred two year’s after the project’s strong sales launch. The project is scheduled to open in 2012. At the same time, product design remains critical and there are examples of branded residential products that have struggled as a result of their inability to address the changing needs of target markets.

Developers considering greenfield mixed-use developments with hotel components may look to branded residences as a means of accelerating capital return and improving IRR. A common strategy sees residential inventory form part of the hotel key count, enabling hotel developers to meet scale requirements of their hotel management partner without proportionate capital deployment. In this scenario purchasers agree to limited personal usage rights, so that their units can be included in a rental program and serve as an extension of the hotel’s inventory. The developer receives the proceeds from the residential sale, yet maintains a commercial interest in the rental program. The Banyan Tree’s residential product is an example of the concept, where owners are limited to 60 days of personal usage per year. 

In other instances, residences are designed to serve as a primary residence or second home. This drives a very different approach to design, emphasizing privacy and exclusivity (as opposed to a design that supports nightly occupancy). Profits from residential sales help to monetize land and the infrastructure costs of the broader development and drive overall project IRR. Upon completion, residence owners share in the operating costs of the project, shouldering proportional amounts of shared services. This effectively lends scale to the project and further enhances asset performance.

Licensing an established residential brand of course eliminates the need for developers to establish their own independent product positioning. Effectively, brand development costs are converted into a variable success fee (payable to the brand owner). The brand owner also lends support to product development phases, providing standards for construction and defining service offerings. Another piece of the value proposition for the developer is the potential to leverage the brand owner’s marketing assets including customer databases, loyalty programs, brand communication tools and brand equity (including of course the recognition that comes with it).

Several developers have licensed a leading luxury brand to anchor the residential component of their mixed-use development, and then introduced one or more “non-branded” projects subsequently. The branded product serves to position the overall development, establishes pricing levels, builds momentum and drives lead generation. Once traction is established, non-branded products are typically introduced. This strategy allows products to be tiered to meet different consumer needs.

While there are several advantages that potentially flow to developers when they license a luxury hospitality or fashion brand for a residential project, it is an area of niche expertise. New entrants are advised to do extensive due diligence around the licensing model and carefully consider branding options during feasibility and business planning exercises.

In our next post, we will examine this segment from the perspective of companies who are actively licensing their luxury brands, and managing resulting residential projects.

Branded Residential Review - Introduction

Over the past decade “branded residences” have become important components of many leading residential real estate markets, often establishing new benchmarks in terms of achieved pricing, quality and service. The branded residential model typically combines a decidedly upscale residential product with a suite of luxury hotel services that many affluent consumers now demand as integral components of their residential experience. Rather than developing independent market positioning, developers using this model license an international luxury brand to differentiate their residential project.

Given the importance of the service component, luxury hospitality brands have been uniquely positioned to deliver a turnkey branded residence solution – licensing their brands to third party developers who build to a defined brand spec, and then serve as residence manager and service provider post-construction. Shangri-La, Four Seasons, Fairmont, Raffles, Jumeirah, Ritz Carlton, Rosewood and Starwood’s W and St Regis brands have all been leveraged to create residential business lines. Commercial terms typically include a variable brand-licensing fee calculated as a percentage of sales revenue and a technical services fee. Services are funded through maintenance fees and in some instances, a resort or hotel access fee. 

In addition to an enticing mix of services and luxurious amenities, consumer confidence is bolstered by the knowledge the product has been built and will be managed to demanding international brand standards. This confidence is reinforced by the typically long-term nature of associated management agreements. While the branded residential model is most commonly applied to whole ownership developments, Four Seasons, Fairmont and Ritz Carlton have also extend their brands to luxury private residence club developments.

The branded residential business is at a crossroads in today’s economy. After a decade of robust growth and the entrance of several new players including luxury fashion brands like Armani, Bulgari and Versace, the global downtown dramatically slowed the pipelines of participating brands and their development partners. With growth in luxury segments clearly returning, it is an opportune time to take stock of efforts to date and to consider criteria for success going forward. A study released by Bain & Company last month forecasts an 8% increase in the size of the global luxury goods market in 2011. This latest forecast follows a 10% (YOY) rebound in 2010 to 172 Billion Euros. Our timely and in-depth review of the branded residential segment will be conducted over a series of posts beginning with today’s introduction. Please also return in the coming days for:


Part 1 - The Developer Perspective
Part 2 - The Brand Owner Perspective
Part 3 - Future Branded Residence Opportunities

Sentiment Upbeat at the Arabian Hotel Investment Conference

LIFT attended the Arabian Hotel Investment Conference (AHIC) in Dubai last week.  AHIC is a great event, bringing together investors from across the Middle East and North Africa (MENA) and attracting hospitality brands from around the globe.  Admittedly, we did not know what to expect from this year’s conference. The backdrop of course is the wave of political and social unrest which has swept across much of the region. While Gulf states with the notable exception of Bahrain have remained stable, markets like Dubai and Abu Dhabi are contending with significant increases in hotel and residential supply. STR Global sees another 25,000 hotel units coming on-line in Dubai, and more than 14,000 in the pipeline in Abu Dhabi.

Nevertheless, sentiment at the conference was decidedly upbeat. Clearly, markets like Dubai, Doha and Abu Dhabi are benefitting from a perceived safe haven status, as consumers and investors place a premium on stability. Occupancy in Dubai was in excess of 80% in Q1 and a 7% increase in REVPAR was recorded over the same period (STR Global).  The good news extended beyond the performance of operational hotel assets. There were reports of Dubai projects receiving new rounds of financing in international markets for the first time sense the credit crisis set in, although it is worth noting that domestic lending remains very restricted.

Most encouragingly from a LIFT perspective was the clear evidence we saw that asset owners and investors are driving innovation in response to the continued softness of residential markets. We talked to owners who are converting portions of residential inventory into serviced apartment products and looking to build rental distribution in order to drive income until residential markets recover. A number of owners are also considering conversion of hotel or residential inventory into shared ownership products (vacation ownership / timeshare, fractional or private residence clubs). It is an exciting time for LIFT, as we specialize in developing and executing the solutions today’s market is looking for.

Next on the LIFT blog we will explore opportunities for luxury brand extensions in some of Asia’s most exciting residential markets.