Hot Topic – Hotel investment trends
Issue 30 - May 07

It has been an active couple of months for hospitality investment in Asia with existing and developing projects trading hands and being announced on a daily basis. Two new trends, the “condotel” and niche luxury offerings are beginning to catch on in Asia.

Many developers want a hotel jewel in their portfolio crown and they will have to research, design and manage them according to the right demographic in the
right location for them to be successful. It is a difficult process. For example, Accor can’t build hotels fast enough, says its General Manager in India, “But we still
turn down more opportunities than we accept because the financial case just isn’t there”. As such, developers are now looking at a variety of new ways to sell part
or all of existing or planned properties.

Leisure properties (not just hotels but the properties with the attendant leisure facilities, such as bowling alleys, restaurants and golf courses) have been subject
to a number of different types of investment including acquisition by REITs and direct investment by managed funds. These products allow for the retail investor to
access hospitality real estate managed by third parties, while developers or owners get financing or income.

Another way that hotel developers finance and minimise their development risk is through the creation and sale of residential units within leisure developments to
multiple investors with the intention that the property as a whole remains under the management of a single entity. Rent is generally split between the manager or
developer and the unit owner. Often called a “condotel” (a fusion of the words “condominium” and “hotel”), these developments are becoming increasingly popular across Asia, for example on 1 March, Ronald Lim, President of Pacific Concord Properties, opened The Lancaster Suites Condo-Hotel in Cebu, Philippines. Though units in the hotel or resort are sold to numerous
owners, the appointment of one manager is central to the success of these developments. If the hotel carries a big name brand then the residential portion might also be branded, increasing the value of the units significantly. If the owner knows they are buying into a branded residence, the developer/manager retains control of the property in a way that strata title selling in a residential scheme often does not.

Gurgit Singh, Director, Property, Sentosa Leisure Group, lists some of the characteristics of condotels that may differentiate them from serviced apartments, hotels and fractional ownership schemes:

• Product quality can range from mid-scale to luxury
• Product is branded
• Higher price point compared to all the other alternatives
• Locations are city centre and resort based
• Can help in urban regeneration
• Ability to transform older developments
• Improve profitability of existing hotels
• Ownership is based on a single unit i.e. a hotel room
• Returns are from income streams, capital appreciation, benefits of use
• Growth potential from income and capital appreciation
• It is a financial investment with or without guarantees
• Liquidity from real estate component
• Can incorporate flexible owner usage
• Exchange potential increasing
• Financial regulators have controls in some countries



More investors now recognise the benefits of owning a vacation property that has
a potential to earn recurrent income and appreciate in value without taking on the
headaches of management. This is because one single operator or manager takes care of the overall sales, letting, managing operational costs and revenues, and the distribution of net revenues or profits to the individual owners.

Gurgit Sing explains further:
A condominium hotel is an individual hotel unit or a hospitality unit in an operating
property which is sold to individual investors who acquire the unit within a
comprehensive development which is managed as a hotel under a particular brand.

Worldwide, developers are responding to this need, as seen in the number of
developments in the Americas, Europe, Dubai and the Phillipines. However, there
are some hurdles that developers hoping to use preconstruction sales of units to fund their project should consider. Some of these are regulatory. In the USA, the Securities and Exchange Commission prohibits the sale of condotels as investments. Sales agents cannot discuss occupancy, rental rates or make representations as to potential investment returns. Developments in the USA have shown that because the condotel market is still in its early cycle, developers are having to sell at least 50 percent of their units before construction just to be able to receive their construction loan.

Notwithstanding regulatory restrictions, most condotel investors take investment
potential into greater consideration than they would when purchasing a vacation
home. For example, in Dubai the compelling reason to buy a condotel is the potential percentage return and in Malaysia the concept of condotels and serviced apartments are so interchangeable that the main reason for investment is the guaranteed returns promised by the developer through the operators agreement.

For prime location branded condotels, the best time for the developer to sell and
for the investors to buy is at the preconstruction stage. This is a win–win situation
because the developer is able to generate enough cash flow for the construction and the investor entering early will be able to leverage on the potential gain by the time the development is completed.



Investors will compare returns on a condotel with other forms of investment and the pace of selling out depends on the desirability of the property based on the brand and location. Some big brands such as Trump International and Hard Rock are able to achieve sell out faster. In general it can take up to two years to complete.

Developers should also realise that investors also have a challenge. Loans to condotel purchases are not considered mortgage loans but are considered commercial loans. This means that the lender may require up to 35 percent as a down payment. Further to this, lenders also require investors seeking a loan to have the ability to pay the mortgage without relying on rental income from the room. This is because hotel rental income is too unstable.

The critical success factors for a condotel development are:
• Location, brand, management
• It has to be an efficient hotel business
• Control over the operating costs
• Optimum owner allocation of predetermined stay days
• Efficient global reservations system
• Transparent and fair remuneration structure

price insensitive
For the top end of the luxury market, the level of design and service required is changing rapidly. Market entrants and hotel owners looking to cash in on this
moneyed sector need to be one step ahead. According to Michael Saglid, Chief Operations Officer, Minor International, after the US$1,500 per night mark
is reached, “there is very little price sensitivity” from hotel and resort guests. Unsurprisingly, this group are highly demanding and are looking for a wider variety of experiences. Regardless of the reason for their stay, guests falling into this category expect their wishes be upheld at all times. Many needs can be catered to
with high-level customer services, but the design and availability of supporting services and infrastructure management are also vital components. Certain trends in design and management of hotel and resort facilities show innovation in this lucrative sector.

If luxury is defined as something that is “excessively expensive”, evidenced by sumptuous living and “an indulgence rather than a necessity”, then the first trend
identified by Saglid might seem contrary. Lately, the super-rich are going against the maxim that “bigger is better” towards a desire for smaller and more tailored
“unique” experiences. Meaning managers cannot easily offset the high cost of top-tier infrastructure and services such as laundries, plumbing and cleaning through economies of scale as they can in large luxury properties.

His company manages the Four Seasons Golden Triangle Tented Village near northern Thailand’s Chiang Rai. A retreat resort for “active adults”, guests pay
around US$1,500 per night for a jungle experience that does not require the sacrifice of luxury. Having a 15 tent “establishment” in such a remote location
poses a variety of logistical issues when it comes to support services and infrastructure. Salgid, whose company manages many of the Four Seasons Resorts in Thailand as well as their own Anatara brand, says that, without their five star Anatara Resort being located 200 metres away, supporting this level of luxury in such a remote location would be “impossible”. Services and infrastructure, such as laundry, additional generators etc, are located out-of-sight but are easily accessible by staff, and since access to the tented camp is via boat, guests are none the wiser.

A central campfire that guests gravitate to at night, and open-air copper baths, are just two of the design features that allow for the “experience” to develop. It is not uncommon for guests to stay days longer than expected in order to spend
more time with the resident elephants. “The true luxury resorts provide indigenous
experiences, opportunities to learn and interact and to challenge one’s self”, says
Saglid. “Travellers seek interaction and to gather lifelong memories, instead of
souvenirs and a tan.”

It follows that hotels and resorts should be designed around the needs of the users, and not designed to deliver the best return on investment (ROI) for the developer. As Sagild points out, occupancy rates and ROI is often higher for boutique establishments. Some of the international brands were quick to access the opportunity. Starwood’s W Hotels for example, is one of the fastest growing hotel chains in the world, and the unique design and customised service promise are the characteristics that it used to define itself. It is opening it’s first W retreat and residence in off beat Koh Samui rather than popular Phuket, for example.

However, Saglid says that often boutique hotels are run by a single owner and can
therefore lack in “brand promise, consistency, systems and timelessness” and “true luxury brands compete on experience, design and quality” not price. So a greater rate of return can be seen on these types of properties only if design and management can deliver. Many larger hotel brands are having difficulty rearranging their development model to accommodate this new approach to luxury travel, so smaller more flexible outfits have moved into this space.

size matters?
The size of the facility is also important. As in the Four Seasons example cited above smaller hotels can be supported by other high-end facilities nearby. The total number of rooms or residences can also be extremely limited to cater to guests wanting to book-out the whole resort for a limited period either for a group or family holiday or as a high-level corporate retreat. Once the number of rooms goes above 19, he continues, the developer is unlikely to attract these ‘buy-out’ customers who can pay rates of US$100,000 per night for the exclusivity.

Attraction and retention of quality talent should be on the minds of developers before commencing a luxury hotel project. The small niche market might be attractive to guests but not to staff. Sharing staff between managed properties can give them a greater exposure to more varied work. Saglid says to attract skilled workers such as spa therapists, choose locations where there are several spas operating in a proximate geographical area. Attention should be made to the staff services, and thus staff retention, at the design stage. RFP

NOMINATE NOW

Subscribe Now

Sign Up for Ezine

Past Issues