The latest long-stay hot topic is rental pooling, something TRI Consulting senior consultant Christopher Hewett says is a concept his company is encountering on a regular basis as developers look at branded residences as an additional development scheme.

“Generally the units are sold to investors with the option of leasing back the apartment to the hotel rental pool for a set period of time,” Hewett comments.

“The developer benefits from a higher sales price due to the brand association, whilst the investor benefits from higher returns due to the increased revenues compared to a traditional residential product.”

Story continues below
Advertisement

But there is an important differentiation to be made between branded residences and hotel apartments, according to Sona.

“The first are units which are sold to private investors and can be rented out via a rental pool managed by a hotel operator, the second ones can only be rented for short or longer term periods,” he explains.

“The correct terminology is serviced branded residences, operated on a condo business model. Hotel owners/developers make it mandatory for individual investors to place their purchased bedroom/service apartment into the hotel rental pool.

“Investors do not have the option to live in their room/apartment, save for a set number of days each year.”

Sona says established real estate companies have in recent years ventured into the development of serviced apartments, for several reasons — a risk mitigation strategy, flexibility and generally because they are more resilient to downturns as the strategy can easily be shifted.

The below exhibit, courtesy of Colliers International, illustrates the mechanisms of the investment process from the perspective of a hotel owner, hotel operator and individual investor.

Step 1

Owner develops and constructs hospitality development.

Step 2

Owner enters into a hotel management agreement directly with a hotel operator.

Step 3

Owner offers units for sale to the market (usually off-plan).

Step 4

Investor purchases unit directly from the hotel owner.
In tandum — the investor enters into a long-term lease agreement with the hotel owner (mandatory).

Step 5

The unit is placed into a rental pool, whereby the hotel operator services and operates the unit as a hotel room/ service apartment.
The investor is a paid a percentage of revenue based upon unit size.
Deductions are made for costs/ fees to hotel operator.

Step 6

The original owner retains the management of the overall hotel building and receives income in terms of profits generated by the hotel managememt company. Investors pay a service charge to go towards the upkeep of the building and for the payment of statutory charges.