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.
No comments:
Post a Comment