During the Mediterranean Resort & Hotel Real Estate Forum, Oct. 17-19 in Athens, Philip Bacon, director of planning, development and valuations at Horwath HTL, will take part in a panel focused on the growth of branded residences. “Branded Residences: the Three-Way-Win” will offer insights on how to ensure a proper balance with the developer, owner, operator and the private investor in a mixed-use project, with a focus on balancing the needs and objectives, as well as the rights and obligations, of all parties.
Ahead of the Forum, Bacon, who has been personally involved in the development of luxury branded residences with brands like Mandarin Oriental, Four Seasons, Fairmont, Jumeirah and Armani, shared his insights on the future of investment in the Med region and how the branded-residences market is evolving.
1. How is the hospitality real estate investment market looking in the Mediterranean in 2018?
[This year] experieced a shift eastwards, both in terms of tourism flows and investor interest, as the more mature markets of the western Mediterranean consolidate the significant growth they have enjoyed over the past few years. This growth, in countries such as Spain and Portugal, cannot be sustained forever and there already are reports of a flattening in the curve. This is normal; consolidation usually follows a period of rapid growth in most businesses. The rules of supply and demand are constants, and the availability of assets and the expectations of investors in terms of return have become--and will remain--the key issues in 2018 and probably 2019, too. As sellers’ price expectations increase due to limited supply and strong levels of demand, there is pressure on yields for investors. Some investors, in particular the bigger funds looking for large, debt- and distressed-asset portfolios, have already started to look outside Spain and Portugal for higher yields in other markets such as Greece and Italy.
2. In which markets are you seeing the most activity and why?
Spain and Portugal still have strong appeal for investment and development, although finding good sites and under-exploited built assets is becoming increasingly difficult. Investors are busy studying competing, specialist asset classes such as senior residences and student residences, which in some cases offer higher yields.
From a tourism point of view, Spain and Portugal have a number of quite distinct regions and cities, and these are experiencing different levels of activity and are therefore attracting different types of investors. The residential markets in both Spain and Portugal have seen significant growth in recent years, often driven by the Golden Visa programs that have fueled interest in resort-based properties. This has a knock-on effect on the hospitality sector, especially tourist apartments, which are destined to become an increasingly important feature of the hospitality sector as operators realize they need to specialize in this asset class in order to compete with the combination of online platforms and local, entrepreneurial managers.
Limited supply is putting pressure on the need for new concept development that will be sustainable for the next cycle and the next generation of tourists. Many existing hotels are stuck in the past and radical change is needed. As they say, there are only two types of hotels; those that need to change and those that need to be torn down. There is no doubt that Italy and Greece also are seeing higher levels of interest from investors, as the banking sector in each country finds solutions to the issues that have arisen over the past ten years. Regions that have been suffering from the geopolitical situation in the Mediterranean in recent years, such as North Africa, have been working hard to find a way forward, and the recent currency devaluation in Turkey has made this part of the region more competitive than in recent years. The more established Mediterranean regions should be careful about being complacent. Both investors and customers take an increasingly global view of their opportunities, and so it is advisable to look over the parapet from time to time and learn from others in order to stay ahead of the game.
3. What emerging markets or destinations are you keeping a keen eye on?
This depends on how you define “emerging.” An example of a truly emerging market is Albania, which is destined to catch up quickly with the rest of its neighbors. Within more mature markets, some destinations are showing signs of being “discovered” or even rediscovered. In the southwest of Spain, for example, the area around the city of Seville, all the way to the coast, offers a relatively undeveloped region that can offer a truly Andalusian experience–quite different from the Costa del Sol. The Spanish “costas” in general are seeing a resurgence of interest in new development, with strong tourism demand being combined in many cases with a still healthy residential market. Italy is always a market to watch, and although development there is notoriously difficult at times, opportunities are still out there to be exploited, taking advantage of a very fragmented supply base.
At the eastern extreme of the Mediterranean region, Greece is making great advances in exploiting some of the best tourist assets in the world in a new, post-crisis environment. Israel remains a very interesting market, with characteristics that are arguably unique, and so, is another one to watch.
4. What are the major challenges to overcome in resort investment and development in the Mediterranean?
A key challenge is always the availability of good development sites and of existing properties that can be adapted or expanded, at the right price. Location, location, location—the rules never change—and it is actually very hard to create a new destination, whatever the master planner may tell you. You need true vision, deep pockets and a great deal of commitment and patience. Even if you can find the perfect site; even if you can create a product that meets the needs of the customer and not just the self-image of the developer; even if you can get planning permission; the practical challenge for developers and investors is getting the project-finance mix right so that risk is shared and projects can actually get off the ground.
Investors and banks are still nervous about new development and this is not likely to change in the medium term. Even if you can get the initial finance, you are then faced with the biggest challenge of them all; executing the project within budget and opening it on time, making sure that it is still going to meet the needs of the target market you identified at the early stages of planning. Development lead times are relatively long, especially for complex, mixed-use resorts, and the project needs to be constantly stress-tested to make sure that people are not “drinking their own Kool-Aid." Finding the right operator is one of the key challenges in the execution process, and then bringing that operator on board at the right time so that the operational realities are properly reflected in design (or in redesign if it is an existing property). Retrofitting a hotel post-opening to fix planning and design errors is usually very expensive and some properties simply never recover from being opened using an inadequate plan.
5. What are the key characteristics of the branded-residences market?
Branded residences are still relatively undeveloped in the Mediterranean, at least compared to North America and parts of Asia, but this is destined to change as the branded players work out how to manage the operational and legal issues that affect each country and region differently, both in city and in resort destinations.
In terms of demand, the demographic realities of Europe and the global political situation represent the key source of demand for residential property in the region, the latter creating demand for so-called “safe havens” for large amounts of capital. As a general rule, people from northern Europe still desire their “place in the sun”; this has been the situation for several decades and is not likely to change, especially as the population of Europe ages and capital is released to acquire real estate, still considered a key component of any balanced investment portfolio. The evolution in the way that people live and work is also a factor in creating demand for branded residences, affecting in particular the high-net-worth and the ultra-high-net- worth segments, and creating increased demand for owning several homes around the world that come with a high level of service and the peace of mind that the property is being well looked after in the owners’ absence.
This is not to say branded residences always have to be positioned at the luxury end of the market, although this has been the trend in the last 20 years or so. There is still room for other levels of the market to be penetrated with a properly conceived branded residential product, but the players in the game will have to make sure that they are aligned in order to achieve the best result for all concerned.
6. What are the key benefits for investors, owners and brands?
A successful branded-residence development is all about the three-way win. The risks of the project need to be properly understood and quantified and each of the three key players needs to assume a fair share of these risks, and therefore, of the rewards that the project can provide. With proper planning and execution, both pre- and post-opening, investors should be able to underwrite their share of risk in a way that brings higher returns on capital and a more secure exit strategy. The brands have an upside opportunity here; by adding tangible value to the marketing and sales process, brands can share in the rewards of property sales through licensing and marketing fees. Individual property owners, especially at the top end of the market, are looking for security and peace of mind; protection of both their home and of its inherent value.
These days, return expectations have been tempered by the post-Lehman [Bros.] period and the nature of the global economy. A safe haven for capital is often the primary motivator for buyers, but service quality and management also are vital areas of added value, especially when the owner is not in residence. This is where the branded operator plays a key role [in] generating room revenue from a residential property, whether on an obligatory rental pool or a “best efforts” basis. This provides income that can be shared between all three players: rental income for individual property owners, management fees for the operator and potential operating profit for resort owners and investors.
7. How are travel trends, such as the rise of serviced apartments or the shared economy, affecting the residential market?
Firstly, I would say the sharing economy is no longer as altruistic as it may have been when the concept was first being promoted. Airbnb is now a long way from a couple of guys offering an air bed and breakfast in a spare room in their apartment. Whether it is accommodation or electric cars, these are commercial operations that are simply responding to a change in the way customers wish to consume goods and services.
But there is no doubt there has been a revolution in the hospitality sector in recent years, fueled by the availability of global distribution platforms; that now brings into question the definition of terms like “hotel” and “serviced apartment.” People need accommodation for a wide variety of reasons; if they don’t buy it, they have to rent it. What makes the difference is why they want it. The developer and investor markets are simply responding to these demands, making use of platforms that reach people efficiently and effectively across the globe, providing specialist products for specialist purposes. A 25-square-meter hotel room is simply a variation on a theme. Perfect for one or two people for a limited period of time, but generally somewhere where you may not want to spend very many hours or very many days.
In the resort world, which is the key focus for MR&H, it is becoming increasingly clear with the explosion in tourist apartments, both serviced and “un-serviced," that people would prefer larger, more residential-style accommodations, especially for longer stays and when with their families. In the traditional hotel sector, this often means a suite, and this typically means limited supply and therefore higher prices, sometimes very much higher and even then, they often only accommodate two people. This does not always respond to the specific needs of the holiday-maker and this is where the availability of a wide range of options has now become the norm. You can see this on any platform like Booking.com. Hotels and apartments are just two more categories to choose from. This trend seems bound to continue.
8. What resort development or brand do you find the most interesting in the market right now?
This is a tough question for a consultant to answer; we like to remain independent. However, what I always find interesting is a spirit of innovation and creativity; thinking about the customer of today and tomorrow. In the end, customers finance everything, especially in the hospitality business, but customers are rarely involved adequately in the planning process. Research is often simply based on what is going on in the immediate neighborhood. Benchmarking is much more than looking at RevPAR performance. A beautifully designed and efficiently constructed hotel or resort, without any guests (or with guests who don’t see the value) is just a white elephant. “If I build it, they will come” is [only] a brave statement unless you can show you really have discovered an untapped source of demand. At the moment, I appreciate what groups such as Palladium Hotels & Resorts, Sani Resorts and Lux Resorts are doing, among several others, but it is also a great time for independent operators focused on the unique aspects of their properties in order to create truly differentiated experience for guests.
9. If you could have a second home in any Mediterranean destination, where would you choose?
My love affair with Spain started nearly 30 years ago and so I am completely biased. Over the years, I’ve lived in Barcelona, Ibiza, Marbella and the Canary Islands, as well as Madrid, and so choosing just one destination is very difficult, but if I had to choose, I think it would be somewhere in Andalusia, close to the sea.
10. What is keeping you busy at the moment?
We are busy in Spain, Portugal and Andorra helping our clients to create new concepts and businesses that take advantage of the trends in real estate investment and customer demand. The combination of the traditional hotel model with various residential models, such as branded residences and tourist apartments, is a particular focus for our planning and development business Line. In many cases, we are dealing with the “recalibration” of master plans that were created many years ago and which need to be adjusted to reflect the realities of the market. A key aspect of this is finding the right operator, and this is an especially relevant aspect of our work in the Mediterranean region where there are still-significant numbers of assets that have reached, or are reaching, the end of their economic lives and are in need of repositioning.
11. What are you most looking forward to at MR&H this year?
I look forward to this year’s forum giving all attendees a really practical and informative overview of the investment and development dynamics of hospitality real estate throughout the Mediterranean. I am sure that the event will be a great opportunity to meet some new people and catch up with some old friends. As they say here: “Hablando se entiende la gente.” In other words, “It’s good to talk.”