Half a decade on from the Covid-19 pandemic, the growth of the branded residential market highlights that residents are looking for more from their homes than simply a place to live.
The branded residential market has exhibited significant growth in recent years, both in the Middle East and globally. Branded residences involve property developers and brand operators working together to produce properties featuring the branding of the brand operator. Whilst these residences have typically been associated with luxury hotel brands, the emergence of brand operators from other sectors, including luxury fashion and lifestyle brands, has allowed developers to target a much broader market.
Dubai is currently the global market leader of branded residences, with approximately 140 branded residence projects in the Emirate. The growing popularity of branded residences can be observed across the GCC, with a number of brand operators establishing residences in countries such as Saudi Arabia and Bahrain.
For buyers, branded residences offer an assurance of quality (and often luxury) under a name that buyers know and trust. These developments also offer access to first-class facilities and resident benefits that would not ordinarily be available elsewhere. For example, luxury mixed-use hotel developments allow access to 5-star amenities on a day to day basis. For branded residences associated with the food and beverages sector, there is the potential for benefits such as discounted dining and premium room service facilities. Beyond this, branded residences hold a certain degree of prestige and allow residents to live amongst like-minded neighbours bearing similar interests to themselves.
The legal requirements
Branded residences developments require a number of complex legal agreements. There are generally more parties and elements to consider than in a straightforward hotel management arrangement, since with branded residences there is also the end-buyers and homeowners associations (HOAs) to consider as well as potentially a separate management company, especially where the brand has no residences operation experience such as the fashion luxury brands. Experts in the sector note that these complex arrangements will require clearly defined roles and commitments from both the buyer and the manager to ensure alignment with brand standards.
The key agreements that need to be in place for a branded residences project would likely include:
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A technical services agreement, in which the developer agrees to develop the residences in line with the brand's brand standards. This will usually be for a fee payable to the brand, similarly to a technical services agreement under a hotel deal.
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A marketing licence agreement, in which the developer is granted a licence by the brand to market the property under the brand's name. This permission will usually be in exchange for a percentage of the sale price of each unit. There are usually strict restrictions on the developer's use of the brand's name in its marketing, and we have also seen brands impose their own template agency agreement to ensure that all agents who are permitted to market the properties are doing so on the same terms.
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A supervisory services agreement which will document the management and additional services that the brand/operator will provide to the residences. This will be between the developer and the brand (i.e. the operator) but there may need to be a further agreement with the HOA for the management of the common areas of the building once the units have all been sold. Some developers prefer to retain an element of ownership within the building/development to ensure that they maintain a certain level of control over HOA decisions and voting. The services provided by the brand/operator will be paid for under the service charge mechanism. However, a la carte services may also be provided, especially in the case of hotel branded residences, which would be payable on a use by use basis.
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Rental pool agreements enable owners of branded residences units to participate in a rental pool whereby their property can be included in the hotel's inventory (i.e. to be booked through the hotel by its customers) for a certain period each year. This is usually on a discretionary basis although owners should be aware that participation in the rental pool will entail stricter policies for their unit, such as specific furnishings and standards to be maintained. Our contacts in the sector have highlighted the increasing popularity of such agreements amongst non-resident buyers seeking returns on branded residences. This can be an attractive option for Buyers looking to acquire such units for investment purposes, rather than as their primary place of residence. However, whilst such agreements may be attractive to investors seeking to prioritise cash yield, hospitality experts also stress that both buyers and operators should be cognisant of the potential impact of such models on asset value. Buyers that opt out of the rental pool arrangement will also face restrictions on short-term lettings of their units so as to avoid competition with the hotel element of the development.
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Sale and purchase agreements will also be required in respect of each unit of the development being sold. These will be between the developer and the end-buyer and will include acknowledgements from the buyer in respect of the branded residences.
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HOA management documents will also be a consideration in jurisdictions where common property is governed and managed by HOAs. In a non-branded common property scenario, the HOA would be responsible for appointing building managers and service providers to the building. However in a branded residences arrangement, since the operator/manager is the brand itself, the HOA must be committed to maintaining the relationship for the long term benefit of all the parties. Careful drafting of the HOA management documents is required to ensure coherence with the rest of the suite of branded residences agreements.
While the governing law of the suite of agreements may vary depending on the preference of the parties, there are nuances around the common property and community management structuring in different jurisdictions, therefore it is vital that the parties seek the advice of lawyers who are experts in the relevant region before entering into any such agreements.
What are the risks for the buyer?
A pertinent risk for a buyer of a branded residence unit is that the brand operator may wish to withdraw its branding from the development. This could be for a number of reasons, such as the termination of the existing hotel management agreement (where there is a hotel element to the development); the expiration of the term of agreements; or due to disputes. In any event, such termination is naturally a troublesome thought for a buyer who has purchased the unit at a premium price with the expectation of specific branding.
The license agreement between the brand operator and the developer will typically contain termination provisions, which set out the circumstances in which the brand operator may withdraw from the agreement and thus have its branding removed from the development. Furthermore, while it is clearly in the owners' interest to maintain the relationship with the brand, and they will have a collective voice in the situation where there is an HOA, there is also the risk that once the HOA takes control of the building, the branded operator is vulnerable to the decisions of the HOA, and individual owners may not be in agreement with the decisions taken by the HOA as a whole.
It will be important for the parties to incorporate provisions into any sale and purchase agreement to mitigate the risk of a buyer seeking legal recourse should the brand operator withdraw its branding. For example, the agreement may highlight that the unit being sold will merely be associated with the named brand operator, and that the brand operator may be changed for another at any time.
Residences developed by brand operators and developers with prior expertise in the branded residential market are therefore likely to pose a lower risk and be more attractive to buyers.
The growth of the branded residential market has naturally attracted a wide range of players and diverse business models, including rental pools, as discussed above. However, experts note that these varying structures will naturally impact upon the investment profile of a branded residence, and buyers must therefore look beyond the traditional real estate assessments and take a more holistic view of the offering.
Branded residences present a relatively new and, in many areas, untested legal framework. It is therefore important that both developers and brand operators alike obtain support from lawyers with specific expertise, not only in the agreements but also in the relevant region, before embarking on the development of a branded residence. For further insights on or support in relation to branded residences, please contact our International Real Estate Team at Trowers & Hamlins.
