Hotels: Investing in branded residences

What are branded residences?

Branded residences are luxury homes, affiliated with and serviced by a high-end brand (usually a hotel brand) and purchased on the open market. Typically, residents have access to hotel amenities, such as housekeeping, concierge services, room service and spa reservations from their homes. In most cases, even the design and furnishings of the residence are curated by the brand. Speaking to hotel operators, traditional branded residences (developed for personal use) are a significant current trend in the London hotel market.

Branded residences differ from traditional serviced apartments in that the occupier purchases a freehold or long leasehold interest in the apartment, whereas serviced apartments are typically rented on shorter leases. However, the rise of purchasing branded residences as investment assets and letting them out in a rental pool arrangement in certain markets may start to blur this distinction from the perspective of the occupier (notwithstanding the different ownership structures in the background).

Branded residences as investment assets

Commercial challenges
Branded residences can be a more attractive investment option than simple luxury apartments in that the asset is managed (and its value is enhanced) by a best-in-class hotel brand. However, when a block of branded residences is developed for investment purposes, complexities in the ownership structure of the units can cause commercial challenges for operators and investors.

In markets where branded residences have started to be developed as investment assets (notably, in Dubai), developers sell the units making up the development to various private investors who commit their units to a rental pool. The investors then let their respective units to third parties and the rental pool is serviced by an operator brand.

Understandably, operators need the certainty of knowing that a certain number of units will form part of the rental pool that they service in order for the arrangement to remain profitable. In other words, if at any point a unit is empty as the investor cannot find a suitable tenant, or if an investor decides to occupy the unit personally, operators want to be sure that they do not lose business by investors withdrawing their units from the rental pool. Some operators’ terms therefore prohibit, for lengthy periods of time, withdrawal of units from the rental pool and investors must accept the risk of bearing the baseline costs owed to the operator through the rental pool arrangement in the event that the unit is not tenanted. The exact balance of risk between investor and operator is development-specific as it will depend on the terms negotiated, market conditions and jurisdiction.

Planning complexities
Given that several major hotel operators have already developed traditional branded residences in the UK, it looks as though there will be growing interest in this type of investment model in the near future. If so, it will be important to understand what planning use class branded residences fall under, as they are clearly different to both the traditional C3 residential use and C1 hotel use. Looking at planning permissions granted to date it appears that most local authorities accept branded residences as falling within use class C3, despite offering services that you would expect as part of a traditional hotel model i.e., laundry services, concierge etc.

Additional use class issues may also arise depending on the length of time that the property is used for short term lets. Under current planning law a C3 use can be let on a short-term basis for no longer than 90 days per calendar year. Any property that is used for short-term lets over this 90-day threshold will trigger the need for planning permission as it would constitute a ‘material’ change of use. However, the Government is in the process of consulting on proposals to amend the threshold of days allowed so this position may change.

Overall, branded residences can be savvy investment assets, but investment does not come without commercial and legal challenges. As the trend towards investment in branded residences is anticipated to increase within the UK, it will be paramount for investors and operators to ensure they have the correct structures and consents in place so that they can navigate the complexities specific to the UK legal and planning framework safely.