Luxury Hotels and Luxury Brands Are All Opening Hotel Residences. What Kind of Property Business Is That?

Developers and hotel brands are betting that in a world where the outlook keeps getting murkier and young people are broadly broke, a tiny few will keep getting richer.

After the Chinese food, the red wine and the slide deck, more than 30 guests filed out of the banquet hall on the 66th floor of the Park Hyatt Guangzhou. All were in formal dress, most of them women.

"Young, wealthy women like Zhang Zetian are the main target of this event," an employee of the property sales firm that helped organize it told QDaily.

What was being sold that evening was Crown Residences at One Barangaroo, a branded hotel residence in Sydney, New South Wales — the first branded residential project developed by Crown Resorts, the Australian group that owns casinos, resorts and hotels. The residences occupy floors 33 to 65 of the Crown Hotel on the south side of Sydney Harbour, what the marketing calls "irreplaceable, exclusively customized homes," with access to the services of a hotel billed as six-star.

The building was designed by the British architecture firm Wilkinson Eyre, which also did Southampton City Council's new SeaCity Museum and the Guangzhou International Finance Center tower. The interiors went to Meyer Davis, a New York studio that has also designed W hotels. The location is another selling point: central Sydney, on the water, a few minutes' walk from the business district, the wharves, the Sydney Opera House and other attractions.

"Hotel residences are a very good investment," said Erin Van Tuil, a director at Knight Frank, the British property firm handling marketing and sales for the project. Crown Resorts plans to make the building a new Sydney landmark, and owning an apartment in it will be read as a marker of success and wealth.

Knight Frank ran similar invitation-only events in Shanghai and Beijing at the end of 2018, after earlier sessions in Sydney, Hong Kong and other cities. The focus on young women comes from the sellers' belief that they have money to spend, or can sway what a family buys. A report the firm published in 2018 found that branded hotel residences carry a premium of 25% to 35% over comparable unbranded properties.

A report published in September 2018 by Savills, another property consultancy, put the average price per square meter for branded hotel residences 31% above unbranded ones. The gap varies by market: more than 50% in Bangkok, 38% in Dubai, 8% in London.

Bloomberg has reported that in emerging markets the premium runs higher still when a branded hotel residence is the first home in the area built to international luxury standards. The Ritz-Carlton residences in Bangkok, in the tower known as Thailand's tallest building, MahaNakhon, sell for more than 80% above comparable unbranded homes; in Almaty, Kazakhstan, the gap tops 150%.

One Barangaroo has already been called Sydney's most expensive apartment building. Two-bedroom units start at AU$9.5 million (46.13 million yuan), and according to published reports the first buyer has paid AU$60 million for one of the largest top-floor apartments, about 800 square meters. Before that, the highest price paid for a Sydney apartment was AU$2.6 million, at Opera Court in 2016.

Data from the property site Realestate.com.au shows the median sale price for one- to three-bedroom apartments in central Sydney in January 2019 was AU$1.0125 million — less than 11% of the price of One Barangaroo's smallest two-bedroom unit.

Next to the 250 million yuan asking price for an apartment at Park Hyatt Residences in Beijing's China World — 57th floor, 546 square meters — it looks less impressive. "Here and across Australia, branded hotel residences are just getting started. The market opportunity is large," Van Tuil said.

China got started before Australia did.

According to the report, the United States is the largest market for branded residences, with 130 projects, or 32% of the world total. Europe has fewer: 51 projects, 13%. The Asia-Pacific has 120 projects, 30% — and China is the biggest market within it, with 30.

By QDaily's incomplete count of branded apartments in Beijing, Shanghai and other Chinese cities, 12 brands have built 42 branded hotel residences in 14 cities since 1992 — among them the Beijing Zitan Marriott Executive Apartments, Armani Apartments Beijing, Bulgari Residences Shanghai and St. Regis Villas Lijiang. Twenty-four of them went up in the past three years.

Branded serviced apartments catch on, and developers hire a name to vouch for them

Unlike a hotel's single-room layout, these apartments come in several configurations, usually one to five bedrooms; in some units with two bedrooms or more the master bedroom has its own bathroom, and the apartments add an open kitchen, a washer/dryer, an iron and other household equipment.

They all share the same selling points.

First, a big name behind the door. That runs from luxury brands such as Mandarin Oriental, Four Seasons and the Peninsula, to the high-end lines inside larger groups — W, JW Marriott, Park Hyatt — to newer arrivals from fashion, such as Bulgari and Armani. Whatever it is, people have to have heard of it.

At One Barangaroo, Crown Resorts is both developer and brand. That is not the usual arrangement.

In the great majority of branded hotel residences, the brand does not own the building.

The owner is still the property developer. Typically, once a developer has a parcel of land, it works with an outside consultancy to decide what to build there. After it settles on a brand partner for a hotel residence, the brand supplies the fit-out and design standards; the developer builds, then hands the finished property to the brand to run, manage and service day to day.

Big hotel brands all want a striking design, and the serviced apartments that open alongside a hotel usually get a well-known designer too. The Park Hyatt Beijing hotel and its apartments were designed by Peter Remedios, the American hotel interior designer the group appointed; Bulgari Residences Shanghai was built by Antonio Citterio Patricia Viel, one of Italy's most prestigious architecture practices, and the pitch is that it keeps an Italian style while taking in something of Shanghai.

They also tend to sit on good ground. Good hotels are almost always in the core of a big city, or on the best view in a resort town. The Park Hyatt above is in Beijing's China World; Bulgari Residences is in OCT Suhe Bay in Shanghai's Jing'an district; Mandarin Oriental and Marriott International have apartments and hotels in Beijing's Wangfujing and Financial Street; St. Regis Lijiang sits inside Lijiang's old town, ringed by the Jade Dragon Snow Mountain.

The service is the hotel's: housekeeping, concierge and valet parking around the clock, plus a gym, a pool, restaurants and a club inside the building. Unlike a hotel, the rooms are not cleaned daily — usually twice a week, or as each resident prefers.

Brands also draw the line differently on what hotel-style service means. Swire Properties wrote to QDaily that because hotel residences are sold on a different basis, residents generally want more privacy and ask for relatively little room service.

Swire Properties builds and runs its own hotels and hotel apartments: The Temple House in Chengdu, The Middle House in Shanghai, Taikoo Place Apartments in Hong Kong. CBN Weekly once reported on Sijihui, the Four Seasons hotel residence in Shanghai, describing an information system that records owners' personal details, breakfast preferences and pets' names, and a director of residences who can name many owners on sight even while running several hotels. Naming the guest is exactly the sort of service luxury brands like Four Seasons like to advertise.

A Savills report counted more than 400 branded residences worldwide as of 2018, 85% of them under hotel brands and 15% under non-hotel brands. More than 40 large hotel groups — Marriott International, Four Seasons, Hyatt, Wyndham among them — account for 65 branded hotel residences; the non-hotel side includes luxury names such as Aman, the Peninsula, Bulgari and Armani.

Branded hotel residences began as a high-end apartment business, and came to China with the foreign companies

The first apartment hotels go back to New York in the late 1870s, where they served single men and young families. They then boomed in the United States after the First World War. In 1920s America, new train stations, airports, highways and bridges gave trade and migration their infrastructure: Chicago, for one, had 3.3 million residents by the late 1920s, 120% more than at the start of 1900.

Hotels grew quickly in those years, offering a convenient way of life to the traders and entrepreneurs of the day. Day Monroe, a Chicago sociologist, interviewed businesswomen and women doctors at the time who said living in an apartment hotel spared them housework and let them put their hours into their work.

The Ritz Tower, the Sherry-Netherland and the Savoy-Plaza were all apartment hotels built in New York in this period. According to The New York Times, by the start of the Depression in the 1930s New York had as many as 150 apartment hotels, housing about 15,000 rich or middle-class families.

Serviced apartment hotels then declined with the Depression — some became ordinary hotels, some closed. Only in the late 1980s, as economies globalized and multinationals spread, did they grow again. Hotel brands familiar today, Four Seasons and Aman, went on to open apartment hotels in Boston and Bangkok.

Branded serviced apartments reached China with the foreign companies. Data from the National Bureau of Statistics shows the number of foreign companies in China grew quickly from the 1990s and peaked in 2005. The count stopped rising after that, but their payrolls grew five or six times over, from 3.06 million people in 1999 to a peak of 15.66 million in 2013.

Back then apartment hotels mainly housed employees posted in from abroad. Several Fortune 500 companies gave foreign executives sent to Beijing a housing allowance of 20,000 to 50,000 yuan a month.

In the early years, the Ascott, St. Regis and Kempinski apartments in core Beijing areas such as Dongzhimen and China World were occupied almost entirely by foreign-company staff. It was not only an executive perk: many software engineers Microsoft recruited from other cities for Microsoft Research Asia spent a transitional month at Ascott's Somerset serviced apartments in Haidian.

A one-bedroom at Somerset in Haidian rents for nearly 20,000 yuan a month. Not many people would pay that themselves for a long lease.

"The opening for apartment hotels really came from a change in the whole business way of life. It met the needs of the many business travelers and embassy staff who traveled constantly and had to live long-term in a core city. Back then the whole industry was driven from the consumer side," Zhao Hui, vice president of development and strategic alliances for Greater China at Wyndham Hotels & Resorts, told QDaily. Wyndham's apartment hotel in Xi'an opened in 2016, next to the development zone that houses the Xi'an offices of foreign companies such as Samsung and Oracle, and near tourist sites and shopping centers. It offers both long and short leases, with room types running from a traditional one-bedroom hotel room to one- to four-bedroom-plus apartments, duplexes and tower units.

But foreign companies in China are not what they were. A hiring outlook survey by ManpowerGroup, the foreign HR firm, shows their employment confidence falling steadily since 2010. In the fourth quarter of 2010 the hiring outlook index for foreign companies was above 50%; by the first quarter of 2018 it was 9%.

With fewer foreign executives in apartment hotels, state-owned firms under an anti-corruption campaign and private firms cutting costs, average profitability at apartment hotels — and across the hotel industry — has been falling.

A 2017 report from Horwath HTL, the hotel consultancy, shows the profitability of high-end hotels clearly trending down in recent years: the operating gross margin fell from 41% in 2006 to around 31% in 2016.

Jiemian News, citing data from the Supervision and Administration Department of the National Tourism Administration, reported that China's 615 five-star hotels averaged 430 yuan of revenue per available room in 2011, the peak of recent years; by 2015, with 789 five-star hotels nationwide, that had fallen to 369.84 yuan.

While hotel profits shrank, Chinese home prices rose unusually fast: the average price of commercial housing has climbed 315% over the past 20 years.

Citing data from THS iFinD, QDaily found that in the year-on-year price growth of new and existing homes in first-, second- and third-tier cities from 2013 to now, the sharpest rise came in first-tier cities in 2015, for both new and existing homes.

Housing in China is at once an investment and a consumer good, and it is still the country's best investment. The China Household Finance Survey run by Southwestern University of Finance and Economics shows Chinese households put more than 60% of their savings into housing in 2013; by 2017 that figure was 73.6%, almost twice the American level.

Selling beats renting, and branded hotel residences become a property investment too

China discourages buying multiple homes in various ways, and branded hotel residences have become a new investment product. Their tenure usually runs only 40 to 50 years, but they are not subject to purchase limits. Once prices of 70-year-tenure housing in an area have jumped, investors turn to this kind of property.

And hotel residences with a luxury name on them tend to occupy a city's most central ground, which gives them room to command a premium.

QDaily called sales agents for luxury branded apartments in Beijing, Tianjin, Xi'an, Nanjing and other cities. The rules on buying and selling them differ by region, but for the most part they can still be freely transferred.

Beijing has explicit restrictions on selling commercial-residential property, but the sales agent for Park Hyatt Residences, the apartments attached to the Park Hyatt Beijing, said the Yintai Centre where it stands was approved on residential land, so it carries a 70-year tenure and can be freely transferred.

The sales agent for Sijihui, the apartments attached to the Four Seasons Hotel Tianjin, told QDaily that individual buyers face no purchase or mortgage limits there, and that under Tianjin's talent-recruitment policy a buyer can even register a household residency (hukou) at the address; reselling costs an extra 3% deed tax. The Four Seasons Hotel Tianjin only opened in 2017, but its room rate has stayed a little over 1,000 yuan a night for years, making it roughly the cheapest Four Seasons in the world.

Some run into trouble. An agent for the Fairmont apartments in Nanjing said the units cannot currently be bought or sold, for reasons he could not specify, and that rents are down about 19% from the usual level. He said that also reflects what the industry does around Chinese New Year.

For a developer, the choice between a hotel and a hotel residence comes down to one thing: when the money it puts in comes back.

The hotel brands and property developers QDaily spoke to all said the payback period on a branded hotel often runs past 20 years.

JLL's 2018 study of hotel management contracts shows the same long payback and high costs.

Two-thirds of the contracts hotel developers sign with global management groups such as Marriott, Hilton, InterContinental and Hyatt run 15 to 20 years. And 55% of hotels sign fixed-fee contracts, paying the group a set management fee whether business is good or bad. What that buys is the group's brand, its management experience and the bookings of its loyalty members — mostly business travelers who are not very sensitive to price.

The money does not always come back. Among luxury brands in first-tier cities, W Beijing – Chang'an gave up its brand this January and the Wanda Sofitel was renamed the Wanda Vista, both because sustained operating losses forced a change of brand. The first case goes back to 2014, when COFCO Group, whose Beijing Gloria Hotel was losing money, switched it to Marriott's W brand — and four years on, the W had run up cumulative losses of 300 million yuan.

Add the change in the wider environment, and new hotel property investors care more about return, above all short-term return.

"Today's hotel investors compare hotel property with apartments, office buildings and so on. On short-term returns, apartments and homes you can sell pay back faster," Wyndham's Zhao Hui said. A former China Jinmao employee, who asked not to be named, also told QDaily that selling hotel residences gets a company's money back faster than a traditional hotel does. China Jinmao, as a developer, has worked with brands including Hyatt's Grand Hyatt and Marriott's Westin in Beijing, Shanghai and other cities, on everything from everyday hotels to apartments to resorts.

Branded apartments are sold in two ways: the owner lives there, or leases the unit back to the developer for a term the developer sets, after which the hotel brand runs and manages it, offering long or short leases to business travelers, diplomats and other foreign residents.

The former China Jinmao employee said the money in a sell-and-lease-back unit is split two ways: besides the licensing and management fees the developer pays the brand, it also owes the individual owner — the person who bought the branded hotel residence — a return of 6% to 8%, with the details negotiated between the two.

Zhao Hui said that, to keep management simple, brands generally arrange with the developer for a lease-back agreement to be attached at the point of sale: the unit is sold to an individual owner, leased back to the developer, and then handed to the brand to manage and operate as a whole.

Securities Times has reported that in 2013 hotel-residence "wealth management products" appeared in Dongguan and Huizhou in Guangdong and Sanya in Hainan: an individual would buy an apartment and lease it back, earning 6% to 15% a year plus more than 30 nights a year free at the same hotel brand's properties in other cities. Lease-back hotels became a new kind of investment and a new sales pitch. A 2014 slide deck on the Great Wall International Apartment Hotel, posted online by Dongguan Ruifeng Real Estate, sold the apartments by comparing their returns with bank wealth-management products and deposits.

In the end it is a bet that, in an age of widening inequality, the rich keep getting richer

Hotel residences, apartment compounds, hotels, office buildings — to a developer they are all just investments.

But in China the easiest thing to resell is still a home. Housing here is both an investment and a consumer good, and its room to command a premium depends on how strongly buyers expect prices to keep rising.

Shifting policy on commercial-residential property, high down payments, 40- to 50-year tenure, commercial water and power rates and the impossibility of registering a hukou all hold branded hotel residences back as investments.

The sales agent for Sijihui in Tianjin told QDaily that hotel residences usually take three to four years to sell out, twice as long as ordinary housing.

The former Jinmao employee said hotel residences are also sold before completion, and that ideally every unit would be sold by opening day, so the brand can get on with running the place. But the Wyndham Grand Plaza Royale apartments, open since 2016, and Sijihui in Tianjin, open since 2017, are both still selling.

Institutions that invest in these projects protect their principal. Palm Eco-Town Development, one of the backers of St. Regis Villas Lijiang, put 170 million yuan into the developer, bought about 9,444 square meters of the villas and agreed a consignment sale price. If the villas do not sell and the developer disposes of them below that price, it has to make up the difference itself. On top of that, Palm Eco-Town Development locked in an annualized 15% interest return in the investment agreement, also paid yearly by the developer.

Buying a hotel residence as an investment and leasing it out the rest of the time sounds sensible enough, but it leads straight back into the traditional hotel business, and the same problem with returns.

Developers may be less keen on hotels than they were, but they still believe in brand-plus-hotel-residence in China.

Govinda Singh, director of valuation and advisory services for Asia at Colliers International, told QDaily that developers, aware of what a brand can add, increasingly use mixed-use models combining a branded hotel with apartments.

Swire Properties and Rosewood Hotels both told QDaily by email that they have launched their own apartment products in response to that demand. Shangri-La has twice as many apartments in China as in the rest of the world combined, and more of them in second- and third-tier cities; Beijing and Shanghai, which each have several Shangri-La hotels, have one Shangri-La serviced apartment each.

What developers are counting on is the potential of a few. Knight Frank's wealth report shows that the number of people worldwide with net assets above US$50 million grew 18% in the five years to 2017, and is forecast to grow another 40% in the next five. A Credit Suisse report likewise found that the richest 1% of the world's people hold 50.1% of its wealth, up from 45.5% in 2001.

In the end, developers are betting on the vitality of a small market that does not much care about short-term returns. They are betting that in a world where the outlook keeps getting murkier and young people are broadly broke, a tiny few will keep getting richer.

Reporting and data / Gong Fangyi, Xie Jinping

Graphics / Feng Xiuxia

Cover image / Agoda; banner image / Steven Garcia on Unsplash