Stock - Dubai skyline / Dubai property / property market / Dubai
These days, don’t be surprised to see more uber-fashion brands try to have their place in Dubai’s branded residences space. They will give some stiff competition to legacy hotel operators. Image Credit: Bloomberg

Initially, the concept of branded residences originated as a way for luxury hotel brands to widen their offering beyond the traditional accommodations. Over time, the concept diversified, with more brands extending their reach to target various market segments.

In the GCC, Dubai is the only city to feature in the list of Top 20 branded residential markets, representing 41 per cent of the total supply in the region. With a 400 per cent increase in the supply of schemes over the last decade, the region continues to attract interest and development from global hotel and fashion brands.

Across the Middle East, the current supply is projected to increase by 86 per cent by the end of 2027. As demand for branded residences continues to grow, let us look at the implications for various stakeholders involved.

For the developer

Partnering with a recognized brand can enhance the marketability and valuation of the development. A brand’s reputation and expertise can attract potential buyers, differentiate the project from competitors, and potentially lead to higher sales prices and faster sales velocity.

Across EMEA region, the average price premium for branded residences stands at 36 per cent compared to non-branded stock - and above the global average of 30 per cent. Branded residences in the GCC have outperformed non-branded luxury residential properties in terms of rental yields as well, with an average of 7.6 per cent compared to 5.2 per cent for non-branded.

While a well-executed branding strategy instills consumer confidence by ensuring the development meets a certain level of quality, standard of service and amenities, it almost always means higher build cost for developers.

Developers prioritize maximizing saleable space, whereas branded residence operators recognize the importance of allocating space for amenities, aesthetics, green areas, and inherently lower-density designs.

In the Middle East, the rise of ultra-high-net-worth individuals (UHNWIs) is expected to increase by 24.6 per cent in the next five years to reach almost 330,000. This rise in UHNWIs has contributed to demand for Dubai’s branded residential market that has grown from representing 3 per cent of all residential sales in 2009 to 19 per cent in 2022.

For the operator and brand

With branded residential developments, operators can earn high income streams through royalty/license fee and residential management fee for managing the branded residences. Royalty fees vary from 3.5-6 per cent of unit sales price for luxury brands; 2.5-5 per cent for upscale brands and 1-4 per cent for non-hotel brands.

Simply put, a branded residence selling for Dh5 million allows operators to earn as much as Dh300,000 per unit, resulting in tremendous RoI for the operator.

Hotel operators also mandate the exclusive management of residential developments during the perpetuity of the residences. The residential management fee is paid through the service charge and allocated to each unit based on typical fair mechanisms to ensure proportionality to the unit size/type.

As of 2023, there are 740 branded residence schemes in operation globally totaling more than 100,000 units, with Dubai having 58 schemes, constituting 7.5 per cent of the total supply. The sector remains dominated by hotel brands (86 per cent of all schemes) but with such strong growth, it is also attracting the attention of fashion brands.

However, when choosing a fashion brand, developers need to outsource the management of the residences to a third-party operating company, thereby involving another stakeholder in the mix.

For end-user

Positioned as superior properties, branded residences are associated with reputable brands that can contribute to long-term value appreciation. Such residences tend to attract higher rental rates and occupancy levels, providing potential rental income for owners who choose to lease out their units as part of the rental pool managed by the hotel brand.

The rental yield is accompanied by asset appreciation as an additional advantage.

As the development of a branded residences project involves multiple stakeholders, it requires multiple contractual arrangements, with all working in tandem for the betterment and premiumization of the development.

If the branded residences are part of a mixed-use project including a hotel with the potential of a rental pool, the complexity deepens arising the need to take swift - but correct - decisions on partners and partnerships.