Demand for Branded Residences
Branded residences is the latest trend in the global real estate market. Branded and luxury residences have grown exponentially over the last decade, especially following the recent Covid-19 pandemic. Leading real estate consultancy, Savills has stated the sector has grown by 150% in the last ten years globally. Dubai real estate developers have also strongly embraced the demand for such properties.
Branded residences are typically residential development offerings that are sold and/or managed in association with a brand. Branded residences may also form part of a mixed used development with hotel, retail and commercial components.
Morgan’s International Realty half yearly report for 2022 states there were a total of 58 branded residential developments in Dubai. Compared to the first half of 2021, the number and value of branded residence transactions have increased by 141% and 185%, respectively, in 2022. 56% of transactions were primary market (off plan) transactions, demonstrating high demand for such properties in Dubai. Spears, a wealth management and luxury management lifestyle brand, predicts that Dubai will increase branded residences by 73 per cent by 2027. Morgan’s International Realty states that the average price per square foot for branded residences in Dubai reflected a 37% price premium over non-branded developments in the same neighborhoods.
Christie’s International Real Estate opines that branded residences gained significant traction on account of Dubai’s maturing luxury real estate market, the country’s efficient response to Covid-19 and attractive residential visa schemes. The pandemic inspired many buyers to revisit their perceptions of what homes should offer and branded residences fulfil certain requirements by offering ultra-luxury amenities and facilities. From an investor’s perspective, owning a home within a branded residence project provides the flexibility to live between destinations with reduced home safety concerns and without the need to engage an independent property management company. Further, some international branded residences offer privileges that owners/residents can avail at their branches worldwide.
Luxury hospitality brands have traditionally dominated the branded residences market. However, increasingly varied non-hospitality brands, including fashion brands, are entering this market. Several non-luxury hospitality brands have offerings in the upper and midscale segments reaching a wider market base. Market forecasters predict that this sector will grow both in numbers and range of offerings, for instance, associations with technology brands, focus on environmentally sustainable living, and automobile brands seeking to expand their products and consumer base.
This article explores the various considerations that developers, investors and hospitality brands should take into account when seeking to invest in branded residences in Dubai.
Key Considerations
Brand operator: A brand operator must consider the credentials, experience and reputation of the developer, the location and kind of project it wants its brand associated with, i.e. ultra-luxury, luxury, upscale and midscale, bespoke / niche etc., and the potential benefits associated with such partnership. The brand operator will also need to consider the extent of its involvement - whether it will be actively involved in providing services, undertaking marketing and sales or simply providing branding and/or IP rights.
Developer: A developer must consider the potential benefits of associating with the brand keeping in mind market demand for the type of projects it intends to launch - would the brand attract premium pricing and sales to justify royalty fees and other remuneration potentially payable to the brand operator? The developer must also evaluate the nature and extent of brand services that will be associated with the project. Where the branded residences are being developed in conjunction with a hotel, the developer must also consider the nature of amenities and facilities that will be provided by the brand operator to the owners of branded residences.
Purchaser / investor: A purchaser of a branded residence must consider their objectives when investing in a branded residence - will it be a primary home, a vacation home or simply an investment yielding income. In case of the latter, a mandatory rental programme undertaken by the developer or operator may allow the property to be continuously maintained whilst yielding an income without the investor having to manage administrative aspects. In case of a primary or a vacation home, the purchaser may focus more on the amenities and facilities being provided as well as any membership privileges that the brand may offer. The purchaser must bear in mind the additional premium payable for association with the brand including the incremental fees payable for the services, amenities and facilities provided by the brand.
Contractual arrangements
There are a number of contractual considerations to take into account in respect of a project with a branded residences component. Here are some examples:
Technical Services: The brand operator normally requires the branded components of the project to meet its brand standards, namely in respect of quality, appeal, finishing, aesthetics and management. During the construction phase, this is usually addressed by way of a design or technical specifications agreement between the brand operator and the developer. Approval of the brand operator may be required for the materials used and satisfactory testing and commissioning must be undertaken. The brand operator may also have the final say on design aspects of the branded residences component.
Licensing and IP rights: The developer of the project will commonly require the use of the brand’s logo and other intellectual property in its sales and marketing materials. Brand operators will normally enter into a licensing arrangement with the developer enabling use of the logo and other intellectual property in sale and marketing materials for the branded residences, in exchange for a fee. These agreements usually contain limited licenses for use of the brand’s intellectual property and may also contain provisions regarding how the brand and the brand operator must be represented to prospective purchasers of branded residences. The details will depend on the extent of the brand’s involvement in the project.
Sales documentation: The developer would normally contract with third party purchasers for the sale of the branded residences. The brand operator may, however, retain the right to review and approve the sales documentation to be entered into between the developer and the purchasers of branded residences to ensure that the brand operator’s role in the project is appropriately reflected in such documentation. The sales documentation typically includes an expression of interest, booking form or reservation contract, and sale and purchase agreement. The brand operator may also require the third party purchaser to sign a brand acknowledgement, which contains several confirmations from the purchaser with reference to the limited role and responsibilities of the brand operator in relation to the project, disclosures, release and limitation of liability of the brand operator.
Concierge or A La Carte Services: Branded residences may include a variety of services ranging from the use of recreational facilities (gymnasium, swimming pool) to cleaning/maintenance services for the unit and also access to facilities and services reserved for hotel guests (spa, salon, etc.) for a fee. Such arrangements are normally captured within the sales documentation or as part of a specific services agreement to be entered into between the purchaser and the operator / services provider.
Rental Pool / Management: Some branded residences projects also offer a rental programme. As part of such programme, the brand operator manages eligible branded residences to lease out to third parties on behalf of the respective owner(s), either as part of a standalone rental management arrangement (i.e. where the income to the owner is based on the rental performance of the owner’s specific unit) or as part of a rental pool (i.e. where owners benefit from income generated among all units in the rental pool, regardless of the rental performance of each unit). The income generated from the rental programme is then distributed to the owners of the participating branded residences after deduction of costs and expenses in relation to operating the rental programme and maintaining the units. Certain brand operators require owners / developers to retain significant ownership interests in the project post completion of construction, to ensure there is a minimum number of units available to be managed by the brand operator.
Brand Privileges: Certain global operators may offer additional privileges for purchasers of residences associated with their brand. This could be either in the form of discounted prices for availing memberships, eligibility for exclusive offers and programs or access to paid and exclusive facilities in their properties at select locations throughout the world. Separate documentation may be executed in this regard.
Common Area Management: Since most branded residences are part of a mixed use project, management of the common areas and facilities becomes crucial. Branded residences could either be part of the same structure with common entry and exit with the hotel and other components or they could be in a standalone structure with independent entry and exit. Certain common areas and facilities could be common to the entire project while others may be limited to only the branded residences component. In such cases, the strata ownership structure and documentation should identify the owners of the various project components, and the ownership and management arrangements in respect of common areas and facilities. The management of common areas and facilities for the hotel component and/or the branded residences component could be undertaken by the brand operator under a ‘management services’ agreement for a fee to be borne proportionately by all the owners of the branded residences.
The brand operator may also require an ongoing right to decide on certain aspects of the project as well, for example how common areas are managed.
Master Services: The brand operator may prefer not to contract directly with the purchasers/owners of branded residences in relation to providing services and / or the rental programme. In such cases, the brand operator may enter into a ‘master services’ agreement with the developer to provide such services as nominee or representative of the developer.
Hotel Management: In cases where the project contains a hotel component, the developer and the brand operator may enter into a ‘hotel management agreement’ governing the management of the hotel and the allocation of costs and revenues.
How we can assist
The development of a branded residences project involves multiple stakeholders (owner, developer, financier, brand operator and purchasers of units). This requires a complex contractual framework. If the branded residences are part of a mixed use project, there is an added layer of complexity potentially involving strata ownership and management of common area and facilities.
To successfully implement such a project with appropriate safeguards for all stakeholders, advice must be taken on the project structure, compliance with applicable real estate and development laws, preparation of the suite of documentation to be executed with purchasers, the arrangements between the developer and the brand operator, and the management of the various components of the project, from a legal, commercial, technical and regulatory perspective.
Hadef & Partners is a full service law firm with more than 40 years’ experience of helping clients to navigate the legal and commercial environment when doing business in the UAE. We have unparalleled experience in acting for a variety of stakeholders in such projects, including developers, brand operators and investors. Please contact Ashraf Sayed for advice on structuring, developing, managing and investing in branded residences and mixed use projects in the UAE.
References: