Very often we are asked to advice on selection and appointment of a management company. However, quite often, the project is simply “not ready” or, even simpler, international operator (or regional operators) would not be needed and, in certain cases, negatively impact on the ROI.
International or Regional operators are surely a great help to hotel and resort projects, delivering value in planning, construction, operation and marketing. From the other side, engaging an international operator will cost developers. The main expenses, among the others, will mainly be:
- Increased construction costs due to brand standard requirements and firmer development guidelines (this include also the pre-opening costs)
- Management fee (Base, Incentive and Central Marketing), Technical Assistance fee and other various “hidden fee” such as IT support costs or staff training.
- Controlling mechanisms that may potentially increase operating costs and capital expenditures (such as control over key personnel appointment and group staff policies)
- Harsher FF&E funding requirements.
Bottom line, from time to time, based on property characteristic, market conditions and exit strategy, international brand are not worth the investment and they are not a suitable choice. In our experience, the most likely scenario where developer should consider Asset Management companies instead of international brands are:
- Smaller boutique resorts (less than say 50 keys with strong identity) – where the value of the clients is not given by operational standards and mass marketing but more by uniqueness of the products. You want to control operational costs strictly to ensure profitability.
- Condotel or Second-Home projects (“Some”) – in certain cases, third party management companies will apply operational and brand standard which may have a negative impact on the benefits for unit owners (including free usage and net profit return). For instance, if you are planning to give 8% guarantee return to buyers, can you afford to easily put aside 4% of GR for FF&E each year?
Developers tent to believe that brand will necessary increase the unit price and saleability, which is not necessarily true or, in several cases, the costs associated with the brand is not a net gain for Developers or Unit owners.
- Long term Serviced Apartment (“Some”) – depending on your location and positioning, you revenue could be secured with long term guest and you profit is all about low operational costs. Do you really need a brand for it?
- “Build and Sell” Strategy (short holding period) – do you actually know that, in certain cases, a property with vacant possession, with no management obligations, could trade at higher market value?
- Unclear positioned properties– In several cases, when the property is “not good enough” to be an certain categories, but “too good” to be at lower positioning, some operators would opt for “ fit them all brand”. This may seems to be a good ideas but this unclear brand will, in the majority of the cases, be pricing lower compared to better established brands, especially if the different brand share the same operator.
End result, choosing the right operational model, which in certain cases include Asset Management contract (where a professional operator would simply provide operational support), it may be a suitable option in case where the property features on the investment strategy is not suitable for full brand option. But what about a Franchise … ?