An Overview of Branded Residences in the Middle East

Real Estate & Construction and Hotels & Leisure

The concept of branded residences, where residential property is sold in association with a brand, dates back almost a century.Contents

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Law Update: Issue 369 - Real Estate & Construction and Hotels & Leisure

An Overview of Branded Residences in the Middle East

Ian Arnott
Head of Hospitality Development,
Real Estate

Raneem Salha
Trainee Solicitor,
Construction & Infrastructure

The concept of branded residences, where residential property is sold in association with a brand, dates back almost a century. The traditional model (which is still the most common type) involves selling residences, that are co-located with a hotel on the same site, under the relevant hotel operator’s brand. In the last few years, branded residences have seen prolific growth, particularly in the Middle East region, and have diversified and expanded into different types of branded residences projects, as summarised below, such as standalone projects (where there is no co-located hotel) and projects branded with a non-hotel brand – mostly from the luxury fashion, F&B and automotive industries. In this article, we focus on hotel operator branded residences projects.

Types of branded residences

CO-LOCATED	STANDALONE	NON-HOTEL BRANDS	CONDO HOTELS
Most common type Residences are located on the same site or directly adjacent to a hotel Residences located in the residential component part of a mixed-use development or could be branded villas in a resort The hotel provides services to the residences and will share operating and capital costs relating to facilities common to both components Integration of hotel asset into residential experience Residences may be offered with an optional or mandatory rental pool and placed in the hotel inventory	Becoming more popular No hotel on site or adjacent but has a hotel brand Typically found in prime urban locations Hotel operator may provide services from a hotel it manages in the local vicinity No rental pool as no co-located hotel	Residences with a non-hotel brand and no hotel service Mainly luxury fashion or car brands but also others such a famous architects or celebrity chefs Operated by developer itself, a white label management company or an established hotel operator under dual branding Growing area (particularly in Dubai) but still a small market compared to Hotel Branded Residences	No separate hotel and residences Not strictly branded residences Operated as any other hotel but all units/rooms are owned by third parties rather than the hotel being singly owned All units / rooms are placed in a mandatory rental pool as hotel inventory with usage rights for a certain period of the year

Regional outlookThe Middle East’s forecasted growth rate of 120% by 2030 from its current global supply rate of 12%, exhibits the strongest expansion momentum globally in comparison to other regions. As of mid-2023, over 190 completed schemes dot the Middle Eastern landscape, while an additional 240 schemes slated for delivery by 2030, underscoring the region's dynamism and development potential.^[1]Notably, Dubai stands out as the preeminent hotspot for branded residences both in the region and worldwide, boasting 51 operational schemes, with its total supply expected to nearly double. However, Cairo is also showing strong growth in the branded residential sector, with approximately 17 schemes on the cusp of completion, signalling a significant increase in activity within the Egyptian capital.^[2] This strategic expansion is further evidenced by the substantial pipeline growth in key locations such as Cairo, Jeddah, Doha, Makkah, El Sahel, and Sharm El Sheikh, with growth rates ranging from 200% to a staggering 1,600%, indicating the region's increasing appeal and investment potential in the branded residences sector.^[3]Why are branded residences trending?The aforementioned numbers indicate that the surge in popularity of branded residences is not merely a statistical blip, indeed, these properties offer an array of advantages to all stakeholders involved. For buyers, these properties offer prime locations with first-class design, bolstered by the assurance of superior build quality, management standards, and security measures. Owning a branded residence not only bestows prestige but, with hotel co-located branded residences, also grants owners and occupiers access to a suite of first-class facilities and services on their doorstep, often accompanied by enticing discounts on hotel amenities and dining experiences. The potential for rental income during periods of non-use through hotel rental pools, coupled with the promise of strong resale value, solidifies the investment appeal. Developers, capitalise on this demand, using the proceeds of off-plan sales to finance construction costs and by commanding healthy premiums compared to non-branded properties. Hotel operators benefit through leveraging their brands to take advantage of additional income streams i.e. a royalty fee for licensing the brand to the developer to sell the residences to investors/purchasers and ongoing management fees once the project is completed and operational.RisksHowever, branded residences are not without risk to the relevant stakeholders. For a purchaser / investor, the service charges payable will be greater than those payable for property located in an unbranded development. This is because the development will be provided with additional residential services than would be provided for an unbranded development and will include amounts necessary to maintain the development at the operator/brand’s standards and, with a hotel branded project, to pay the hotel operator’s management fees. There is also no guarantee that the brand will remain associated with the development. If the development is not being adequately funded (through the service charges payable by the residences owners) so that the brand standards cannot be properly maintained or the operator is not able to recover its management fees, the operator/brand may be left with little choice but to terminate the relevant agreements and de-flag the development. Notwithstanding this, operators/brands will always seek to avoid removing their brand from a project, given the potential reputational damage this may cause.For a developer, although it is getting the benefit of significant upfront revenue from the sales of the residences, it needs to consider its ongoing liabilities and obligations regarding the residences once they are completed and operational. The degree of this risk varies from type of branded residences project and the relevant jurisdiction in the region where the project is located – which each have different laws and practices relating to Jointly Owned Property, off-plan sales and the levying of services charges on residences owners.For a hotel operator, the main concern is mitigating potential reputational damage in each phase of the project through various contractual protections. For example, during the sales and marketing process, it will want to ensure that the residences are not being mis-sold by the developer’s sales and marketing team and appointed brokers and that buyers are properly screened from a compliance perspective. It will also require approval rights over the form of sale and purchase agreement used to sell the residences and to make it clear that, although it has licensed the brand to the developer, it is the developer, and not the operator, that bears all responsibility in relation to sale and construction of the residences. In the post-construction, operational phase, an operator will also be concerned regarding such issues as (i) the residences not being let out on a short-term basis through platforms such as airbnb (for co-located hotels this is so that the residences do not compete with the hotel but also, particularly with high end brands associated with standalone projects and where residences are often sold to families to live in, to ensure standards are maintained and a there is not a transient, hotel-like residential community; and (ii) residences being sold or occupied by individuals which are problematic for it from a compliance perspective, such as individuals on sanctions lists. How we can helpWe have extensive experience in advising many developers and brands on co-located and standalone branded residences projects throughout the Middle East region. Such advice includes advising on (i) the drafting and negotiation of the suite of branded residences agreements entered into between developer and operator/brand, which can be long and complex and need to be considered on a case-by-case basis; (ii) the structuring of such projects, including the drafting of the jointly-owned property documentation governing the project to ensure it complies with applicable laws and regulations in the relevant jurisdiction; and (iii) drafting the sales documentation between developer and purchasers/investors.
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[1] SAVILLS SPOTLIGHT ON BRANDED RESIDENCES – EMEA 2023/24.
[2] Ibid.
[3] SAVILLS SPOTLIGHT ON BRANDED RESIDENCES – 2023.

For further information,
please contact Ian Arnott and Raneem Salha.

^{Published in}^{June - July 2024}