Hotel Operations in a Residential Development

Following from my last communication, we discussed briefly the different types of structures that you would see fit for a hotel operation. To extend on these structures I wanted to discuss how residential developments have put in place hotel operational models into these type of buildings and how you can look at alternatives within your own development strategies for exit, greater flexibility and/or return. The idea of a residential developer to look to include a hotel operation within its scope is for these reasons and also varies.

Typically the developer will allow a mixed use to accommodate various solutions. One is a “turn key” solution which is the sale of the hotel component as a single line, this allows a reduced percentage of pre sales required on the remaining residential apartments to seek construction debt funding. However not all hotel operators like to buy freehold therefore the other options is to treat this stock as investment stock and take the strata units to the market with a guarantee return, thus allowing the operator to have a lease in place. You may still sell as a single line entry to a freehold investor or typically in these arrangements individual passive investors. In return the operator is managing a number of landlords vs one.

A Developer likes to take to the market a guarantee return and in addition a brand that has loyalty in the market place for success of pre sales for such stock. A great marketing strategy. Most new developments provide a lifestyle product which reflects the DNA of a hotel and vice versa “a home away from home”, so there is a natural fit for the residential and hotel operations to co-exist. New developments are also providing concierge services and only makes sense having a strong reputable operator to deliver on these services for not only hotel guests but residential owner occupiers.

Another option is providing a structure under management rights, the investor of the apartments in these buildings gets the income of the short term letting and in return the Hotel Operator receives a management fee income. This is a higher return for the investor if appropriately appointing the right operator, a risk reward option, and also depends on the investor risk profile if this is best suited (hence the lease option as an alternative). By setting management rights this way generally only works in large residential complex to cater enough into the rental pool for short term letting to make the hotel operation profitable. The ideal number is from 80 rooms.

The lease and freehold options depends on the product type and its market so this can vary in terms of how many rooms is necessary. It is crucial that the developer prior going to the market assures and does the appropriate campaign to obtain the right operator that performs, has loyalty brand, strong reputation and has a natural fit for the product that they are branding themselves to whom their buyer is… As a developer there are many benefits in terms of brand, value proposition and some comfort when trying to get the residential development out of the ground. It is always necessary to carry out your feasibility to ensure the demographic, precinct caters towards the short term letting that in turn will meet the investment demand and appetite.

Please reach out if you require more information michelle@lsvhotels.com,

Warm Regards Michelle

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