Hotel residences and hotel-condo hybrids are a common and ever-growing type of mixed-use development found in most major cities and vacation destinations around the world.
Commanding about a 10% to 20% premium in most markets, but as low as a 4% premium in Bangkok, for example, and as high as a 40% premium in beachfront Miami, their popularity, in part, is due to the developers’ interest in financing their project and the investors’ interest in recouping their capital.
Because it can cost more than $500 million to build a luxury resort, according to Nick Cassini, the senior vice president of real estate and marketing for Four Seasons Anguilla in the British West Indies, "just renting out hotel rooms—even in a Four Seasons property with high rates—is a very difficult way to regain that capital."
But when there are luxury condos attached, which the developer can price at a premium because of the resort’s amenities, services and branding, and then market to a wide swath of potential buyers by utilizing the managing hotel brand’s databases, "the project’s economics flow more smoothly and seamlessly," said Tina Necrason, the senior vice president of residential at Montage International.
More:Good Market Reports Are Page Turners For the Savvy Investor
In many cases, properties offered in this model are also attractive to buyers—especially those who are using the condo as a second or third residence—because they’re often turn-key, well-managed, and when they’re in the hotel’s rental pool, able to generate income that can go toward home ownership fees. In the best case, they also appreciate more quickly than similar properties outside of this sort of project, experts say.
Of course, every hotel residence or hotel-condo is different, so buyers should know what features to consider when they’re thinking about purchasing a property from this model.
The first things to take into account—as would be the case for any type of purchase—are the property’s location, the views, the layout, and the developer. In this case, the brand association is also important, because this name is going to draw in renters through the hotel pool, and the management company is going to be looking after the property when you’re away.
It’s better to buy into a brand known for its high-quality service and management and pay a premium for that, experts say, than buy into a hotel-condo hybrid where the management company is somewhat of an unknown quantity.
More:Green Homes Are Popular, But Don’t Always Go For a Premium
The second thing to investigate is the condo bylaws and the usage rules and restrictions, said Louise Sunshine, the strategic adviser to Fort Partners, the company that recently opened the Four Seasons Hotel & Residences at the Surf Club, just north of Miami Beach, and is currently developing the Four Seasons Private Residences For Lauderdale.
Many hotel-condo hybrids in the past had strict usage requirements that dictated when owners could or could not use their properties, and if and when those properties had to be offered as rental units to hotel guests. But this is becoming less common, Ms. Sunshine said, as people have pushed back, and have shown that they want the ability to come and go as they please.
In both the Surf Club and Fort Lauderdale properties, there are no usage restrictions. "You can use the property for as little as zero days a year or as much as 365 days a year," Ms. Sunshine said, adding that people are willing to pay more for that privilege—in the case of these Four Seasons properties, one between 30% to 40% above similar condos in the area.
People can also decide whether they want to enter the rental pool in the first place—a choice that is also becoming more common in this sort of mixed-use project.
In some cases—particularly when a property is part of a hotel AND residence, as is common in Manhattan, or is part of a development with some grander, unfurnished condos or standalone homes that can cost $40 million or more—specific units might not be eligible to be rented out at all as part of the hotel pool, even though their owners can take advantage of the same amenities and services as hotel guests. But again, this varies by property. In the Four Seasons Resort and Residences in Anguilla, for example, the five bedroom beachfront villa listed at $10 million would be eligible for the rental pool, with daily rates starting at $20,000.
More:Why A Home’s Historical Value Doesn’t Always Equal a Bigger Sales Price
Because of these distinctions, it’s important to inquire about specific bylaws and restrictions for individual units before moving forward to make a purchase.
Also varying widely from one property to another are restrictions related to furnishings and interior decorating. Some hotel residences, like the under-construction Montage property in Los Cabos, Mexico, will only sell fully furnished units. Others, like the Montage properties in Deer Valley, Utah, and Kapalua Bay, Hawaii, sell some furnished, turn-key properties and some unfurnished residences. But if you’re putting your property into the rental pool, most hotels will have some design standards and guidelines so that there’s a level of continuity throughout the property.
The next thing to consider is how rental income is split. Typically, after a set percentage of the rental income goes to the hotel management company, what’s left is split between the unit’s owner and the building’s owner. Anything between a 60/40 and 40/60 split is standard, said Mr. Cassini, who noted that the Four Seasons Anguilla split goes straight down the middle at 50/50, with half going to Starwood Capital Group, the building’s owner.
In most cases, Mr. Cassini said, the income generated through the rental program, at least in the Four Seasons Anguilla model, offsets the annual home ownership fees, which cover utilities, property taxes, maintenance and insurance for $32 per square foot per year, or $64,000 annually for a 2,000-square foot property.
Most people are happy with this arrangement, Mr. Cassini said. "Owners like the fact that they don’t have to worry about their property when they’re not there, and that they can use it whenever they want, without any ownership costs to worry about," he said.
With all this information at hand, potential buyers should know exactly what premium they’re expected to pay for the hotel residence or hotel-condo, and then do the math to see if it financially makes sense to purchase this type of property in the market that they’re considering, and consider how the purchase will impact their lifestyle. If ease of use is more important than the investment potential, that might supersede other factors.
More:These Luxury Hubs Offer Tempting, Asset-Beating Price Growth… At Least Short Term
But if the financial promise of this model, which relies in part on that rental income, is the most important factor, buyers should look closely at how the hotel performs and operates, go through past rental performance figures for the individual unit they’re looking at, and think hard about what would happen if that rental income went away, experts say.
If the property is under construction or brand new, meaning there aren’t available rental figures, that means more risk on the part of the buyer. Buying a property with a known and well-trusted brand attached might mitigate some of that, Mr. Cassini said.
In the case of older, more established properties, potential buyers can also look to resale figures to get a sense of how the property might appreciate over time.
In the Four Seasons Anguilla property, which opened in 2011 as a Viceroy Hotel & Resort, and only switched to the Four Seasons management team in October, buyers who bought early have seen their units appreciate 15% to 20% in value, Mr. Cassini said. But that’s largely because of overall market dynamics and an evolution in how people view this sort of offshore real estate—not necessarily because of the hotel residence model.
In the case of the Montage Residences, where there are currently 166 residential owners across five locations, Ms. Necrason said it’s common to find double and triple digit appreciation, specifically on units in the first Montage development in Laguna Beach, which opened in 2003.
More:For Some in the Market for a Prime London Property, Renting Makes Financial Sense
While new residential units in the Montage portfolio sell for $1,500 to $1,600 per square foot, and range from $1.4 to $8.5 million, Ms. Necrason said that a resale property in Laguna Beach is currently listed at $19.9 million, and a condo in the Montage Beverly Hills, which opened in 2008, recently sold for $2,900 per square foot at $11.25 million—almost $2.75 million over its original sales price.
It’s important to note, Ms. Sunshine said, that when you compare the appreciation of hotel residences to hotel-condo hybrid units, the residences have the clear upper hand, and are likely to appreciate and sell more quickly because there’s a much larger market of buyers interested in this type of property. "People want that complete freedom to decide how much they use their property," she said.
Here is a look at other news from around the world compiled by Mansion Global:
Anxious London Agents Offer High-End Freebies—Even Cars—To Buyers
In response to London’s struggling luxury property market, agents are offering up increasingly valuable extras, including stamp duty subsidies of as much as £150,000, free iPads and Sonos systems, and in the case of one development in Muswell Hill, a Renault Zoe Electric car worth £18,045 (US$23,000) for every home buyer. Property agent Henry Pryor said, "Developers will sell their first-born to shift them. It’s last-chance saloon stuff. About the only incentive they have not tried is a BOGOF [buy one get one free]." Besides the excess of supply, a decrease in activity from Chinese buyers and uncertainty about the U.K.’s exit from the European Union have fueled the slowdown, which has seen land prices in London’s financial district drop from £861,000 (US$1.1 million) at the time of the Brexit vote to £773,000 (US$996,000) in February. (The Guardian)
More:Developer Uses Wild Gimmick to Sell New York Condos
Vancouver Sales Dropped By Almost 26% In April, But Prices Keep Rising
A report from the Real Estate Board of Greater Vancouver indicates that transactions in April fell 25.7% year-over-year, to a total of 3,553 sales. Detached home sales saw a particularly steep decline, with sales falling 38.8% from the previous year. However, the drop off doesn’t seem to be an indicator of waning demand, as prices continue to climb, bringing the composite benchmark price for all homes up to $941,100 (US$685,000), an 11.4% increase from April 2016. Condominium and townhome sales are on the rise in the area, and account for 68.5% of transactions, 10% more than in the previous year. "Our overall market is operating below the record-setting pace from a year ago and is in line with historical spring levels," said Jill Oudil of the Real Estate Board of Greater Vancouver. "It’s a different story in our condominium and townhome markets. Demand has been increasing for months and supply is not keeping pace. This dynamic is causing prices to increase and making multiple offer scenarios the norm." (Vancouver Sun)
Sales Of New Flats In Hong Kong Hit A 22-Year High In April
Thanks to a growing number of high-priced transactions and new property launches, sales of new development flats in Hong Kong hit HK$37.5 billion (US$4.82 billion) in April, an 81.8% increase from March, and their highest rate since July 1995. The Centaline Property Agency estimates 2,700 registered transactions in the primary market in April, which would be a 90% increase from March. However, the pace of transactions is thought to have been much faster in the first two weeks of April, before a new government policy came into place mid-month requiring a 15% stamp duty for first-time buyers snapping up multiple units at once. Though transactions in which buyers bought multiple properties on the same contract slowed significantly after the new regulations hit, Centaline’s Wong Leung-sing said, "Sales response of new flats may have slowed a bit after the new tax policy, but [the move] is unlikely to suppress demand from end users." (South China Morning Post)
More:Pendulum Swing of China’s Regulatory Controls Could Divert More Capital to U.S.
Shanghai Home Sales Dropped To A Five-Year Low In April
Amid new government controls on sales and a steady flow of new inventory, Shanghai transactions for April hit a five-year low, with the area of new properties sold dropping down to 677,00 square meters, an 8.8% decline from March, and a 30.3% year-over-year decline, according to a report from Centaline Property Consultants. "Buying momentum remained subdued following weak performance in March which used to be a traditional month for notable recovery in home sales," said the company’s senior manager of research Lu Wenxi. New properties sold at an average cost of 46,949 yuan (US$6,808) per square meter, a monthly decline of 1.1%. "This trend will probably extend for another one or two months with government maintaining its strict control in issuing sales permits for high-end developments," Mr. Lu said." (Shanghai Daily)
Spring Season Fails To Bring San Francisco Rents Out Of Their Slump
A fresh round of market reports indicates that even the busier spring rental season hasn’t managed to pull San Francisco’s notoriously high rents out of a recent rut, mirroring a slight rental downturn seen in some of the nation’s most expensive markets, including New York, Honolulu, and Washington D.C. ApartmentList reported a 1.1% year-over-year drop in April, while Zumper reported a 5.9% decline in the same period, and RENTCafe showed a 4.3% year-over-year decline as of March. Though some speculate that the decline is due to an increase in inventory—3,600 new units were added in San Francisco last year—prices were also down slightly in nearby Oakland, where only around 300 new units hit the market last year. (Curbed San Francisco)
More:Click for More In-Depth Analysis of Luxury Lifestyle News
Luxury Sacramento Condo Gives Residents Private Tunnel To Stadium
Sacramento’s large Downtown Commons redevelopment program, which saw the opening of the $500 million Golden 1 Center last year will soon include a residential component, in the form of the still-under-construction luxury hotel/condo tower known as the Sawyer. Prices for condos in the 16-story building range from $600,000 for a one-bedroom to up to $4 million for one of the six penthouses, and concierge services will include an unusual amenity: a private underground tunnel that runs directly into the Golden 1 Center from the building, taking residents and their guests straight from their own parking garage and into the stadium’s VIP lounge. Ownership in the building will also come with access to VIP lounges and seating for Sacramento Kings home games. (Bloomberg)
Australian Home Prices Stall In Response To New Lending Regulations
Tougher new lending standards recently implemented in Australia appear to have had a cooling effect on the nation’s most expensive markets, with overall dwelling prices in capital cities rising by just 0.1% in April, their slowest monthly growth since December 2015, per data from the CoreLogic Home Value Index. Sydney prices stayed mostly flat, while Melbourne saw 0.5% month-over-month growth, Perth saw a 1% drop, and Canberra registered a 2.8% decline. Year-over-year, prices in capital cities rose 11.4% (with 16% growth in Sydney and 15.3% in Melbourne), but the latest slowdown reflects new lending restrictions that came into place at the end of March with the aim of putting the brakes on investment purchases and interest-only loans. "The higher cost of debt, as well as stricter lending and servicing criteria, has likely dented investment demand over recent months," said CoreLogic’s head of research, Tim Lawless. "In a city like Sydney, where more than 50% of new mortgage demand has been from investors, a tighter lending environment for investment purposes has the potential to impact housing demand more than other cities." (Australian Broadcasting Corporation)