Battle of the Brands

A new era of brand mania is currently sweeping the Phuket property market in the form of "lifestyle investment". Mixed-use hotel and residential projects are not only grabbing headlines here, but are becoming a global phenomenon. What's driving this emerging trend and how does it differ from traditional real-estate investing?

In the beginning, or say in the early 90's, came Phuket's first brand-managed product: the villas at Amanpuri. For the first time luxury and resort pampering could be enjoyed not only in a hotel but in your own private residence. Following this came the Sheraton Island Villas and then the Banyan Tree, which was one of the earliest proponents of the private pool villa. As the resort market in the post-1997 economic doldrums in the region suffered, so did the entry of new products to the marketplace.

Fast forward to 2002 onwards, and the cusp of a property boom on the island with new resorts coming on line, and the stage was set to take off from what the Amanpuri had started. The Banyan Tree brought new products to market, the Sheraton assumed management of the Laguna Golf Villas, and eventually Trisara created a similar hotel and villa synergy to that of the Amanpuri.

Moving on to present day and a variety of locations and products are now poised to push into the marketplace. From Jumeirah's Private Island Resort and Cape Yamu on the east coast, to the Moevenpick Residence down south in Karon; Dusit Laguna's new pool villas and the Raffles Resort and Residences in Phang Nga, "mixed-use resort" is becoming a common term. One of this year's most eagerly awaited projects is Bangtao's Shangri La Resort and Residences which was launched recently in Hong Kong and has created a buzz throughout the region. With prices in the range of 40 to 60 million baht and strong early reservations, certainly the brand fascination is bringing new buyers to the shores of Phuket.

So what makes hotel developers diversify their investment strategy and mix hotel and residential products into one? Certainly one of the most obvious is to capitalize on a hot property market, being able to turn superior bottom-line development profit from sales and at the same time maximizing liquidity versus tying up capital in a long-term investment. Secondly, it is a means of alternative project financing. Rather then over-leveraging a project with bank loans, developers are able to bring low-cost equity into a project and accelerate the investment cycle. Equally important is an overall reduction of risk to the developer by diversifying into both the tourism and property markets, hence hedging their bets.

As in any economic boom though, there is a flip side to the coin and some key long-term cause and effects with this type of project. Initially, the restriction of ongoing cash-flow potential for the hotel owner who in a healthy hotel market would stand to make better returns from retaining the units than by selling them to individual lifestyle investors. Of greater significance is the potential to eventually sell a hotel and cash out on a much larger scale. Hotels are usually valued on a cash flow rather than replacement basis and once you remove a good portion of the hotel units from the equation – though the developer was able to cash out on early sales – the overall value of the asset has been negatively impacted. In other words short-term gain may be long-term pain.

This leads us back to where we started. And what does this all mean to an individual investor looking at purchasing a hotel-managed unit? Ongoing yields or rental returns are far more important than with a more traditional house or apartment. Capital appreciation may be viewed differently in a hotel scenario where units must be in the rental pool and the owner does not have an option to live full time in their property. Also a factor is that hotel management contracts have a far shorter life cycle than real property; what happens when the contract expires or there is a change of operators? How might that affect performance?

The brand phenomenon is here to stay, and certainly its entry into the local property market is a plus in promoting Phuket around the globe, not only to real-estate investors but tourists as well. For investors buying on strong fundamentals, international brands that have global distribution and sales and marketing networks overseas will certainly perform at the premium end of the market. Rental returns should benefit from this and ultimately provide an advantage in the marketplace. At the same time, lifestyle investment is just one segment of the property market and one needs to view not only the immediate future but the longer-term horizon. Only time will tell.