21 Oct

Defining Your Development: Holiday Residences or Condotel?

Condotels and Holiday Residences are often identified as similar second home types as they both allow developers to reduce the equity investment and loan by raising additional financing through the construction period from the pre-sale process. However, the majority of developers fail to understand that there is a large variety of products within the categories with different operational and design features. 

These differences will largely impact the planning stages, selling price, operation, branding, construction costs, ADR, occupancy and IRR. Developers should identify the product clearly before commencing planning and design. We have described in this paper what developers should consider when making decisions about the development of condotels and holiday residences.

DIFFERENCES FROM A DESIGN PERSPECTIVE

Condotels

  • The development is built and designed as a typical hotel, equipped with all the facilities, back of house (BOH) and front of house (FOH).
  • Rooms are typically smaller. Once completed, the transient guests or travel agents do not perceive the product as a condo but as a hotel.
  • Efficiency: a condotel requires a hotel configuration, thus the ratio of unit NLA/Total GFA can be less than 50%.
  • Unit mix: the majority of units are studio or 1 bedroom with lower selling price per unit to meet a larger market as the buyers usually purchase condotels for investment yield.

Holiday Residences

  • Holiday residences mainly target those looking for a vacation home for their family. The typical users are travellers looking for comfort of a holiday home rental, usually through Online Travel Agents such as Airbnb.
  • Rooms are more spacious with full kitchen, as transient guests can rent and run as if they were their own homes for the duration of their stay. Other facilities, BOH and FOH are limited.
  • The design requires a residential configuration, which could result in the ratio of unit NLA/Total GFA of more than 75%.
  • Unit mix: besides the studio and 1 bedroom unit types, 2, 3 or even 4 bedrooms are also common inclusions in the unit mix. The buyers typically purchase holiday residences for their own usage and partially for rent.

Who operates condotel and holiday residences?

Most of the largest condotel projects are operated by third party operators, either international or regional brands. Some of best known properties in this category are Movenpick Cam Ranh, InterContinental Phu Quoc, Melia Ho Tram, Hyatt Regency Danang, X2Vibe Hoi An and X2Vibe Pattaya Seaphere, Movenpick White Sand Beach Pattaya and Premier Residences Phu Quoc managed by Accor.

operator-selection

The main advantage of branded properties is the possibility to pass the brand equity into the selling price and the trustworthiness of the professional hotel operation. However, only a limited number of operators accept to manage condotels, especially international operators due to the complication of the ownership structure. On the contrary, third party management can result in some disadvantages related to the loss of control of operation and design standard, which in the majority of the cases, could result into higher investment costs.

A large number of properties are managed directly by the developer, usually under a separate management entity that is built to suit the brand. Some of the best known properties independently operated are Cocobay Resort Danang, The Cliff Mui Ne, The Wide Condotel Phuket and Twinpalms Residences Phuket. A self-branded operation allows the developer to set their own standards for the design and operation which is suitable for their budgeted investment capital.

Holiday Residences, on the contrary, usually offered a limited central support for management. With the absence of front of house, back of house and facilities, it is improbable to offer full operation. Therefore, holiday home units after being sold are usually self-managed by the body corporate representing the buyer. However, in certain cases the operation is still set up and limited to a short or long term rent, with cleaning, security and maintenance support. Some of the best known properties within this category are Azura Danang, Alphanam Luxury Danang, The Ocean Apartment Danang and Cassia Residences Phuket.

4-hotels

HOW DOES THE CHOICE OF BUSINESS MODEL AFFECT SALES?

For the condotel business model, due to the significant amount of future condotel supply, in order to incentivize sales, a very popular choice in the past few months has been to offer a rental guarantee on the condotel product.  The rental return offered in Vietnam can be as high as 12% guaranteed return for a period of 8 years versus the typical guaranteed return of 8% in Thailand and 10% in Cambodia. This guaranteed return is actually, in several cases, borne by the buyers because the guaranteed return is reflected in the higher selling price as compared to the price without a guaranteed return.

As holiday residence projects have higher design efficiency and less investment on facilities, the construction costs per net sellable area is, ceteris paribus, lower than condotel products. This allows the developer to market affordability and future capital gain, rather than guaranteed return.

Conclusion

The main advantages of condotels are the strong operational component of the product, allowing the developer and unit owner to aspire for higher operational yield compared to holiday residence products which are typically more of a lifestyle investment.

The main advantages of holiday residences are lower investment costs and design/execution simplicity which typically are reflected in the lower selling price and room for more capital gains in the future.