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