The Future of Residential Tourism – Part 2

In the Linkedin Group “Residential Resorts International”, an interaction on the article “What is the Future of Residential Tourism” took place and it was remarked that my question was somewhat rhetorical.

True in part, as the intent was to start a discussion, upon which I intended to convey my opinion. That exchange with some inputs on the Linkedin Q&A section is the basis of this article “The Future of Residential Tourism – Part 2”, with some more specific detail on the various challenges.

Surely, luxury residential resorts will continue to be developed although currently having come to a virtual standstill here in Portugal – and most probably in some other (European?) countries.

Unfortunately, developers do not have the best of track records acting as hotel manager. They did not tend to ringfence real estate sales returns or provide sufficient working capital for the hotel/condo operator, whilst customer issues are considered a circumstantial concern. These situations at times only get resolved in by banks stepping in and taking control in situations of financing / mortgaging or by seeking receivership and so being forced or have the opportunity to re-structure. During the earlier mentioned exchange, the comment was made that “…most developers are clueless in resort operation and by the same token hoteliers are equally poor developers and the carnage is everywhere to prove it” and I cannot entirely disagree.

Seeing the different current economic circumstances since the flight of residential tourism some 10 years ago, I would remark the following to make the model of residential resort developments sustainable for the long term:

1) Development Concept Mix; In Portugal quite some developments are made up by a full property concept in a rental scheme with full 5-star hotel services. Unfortunately, considerable units remained unsold and make part of the rental inventory on behalf of the developer / hotel manager; with issues of perceived unfair competition by the individual owners even when independently audited.

It is clear though that due to the change economic circumstances that the “ideal” product mix needs some serious reconsideration. The once (short term?) gain of merely a full property development, might not sustain the operations and so consequently the individual owner investments long term. A variety of products based on different owner usage and exchange schemes provide the necessary “footfall” and referral base and so reduction of risk, whilst brand associations might create further value.

Therefore, I would foresee that more “entry product” is created, supported by upgrade incentive schemes from the various shared to full property ownership concepts. Having said this, in Europe timeshare is not considered property and shared ownership schemes have not really caught on ….

2) Responsibilities; The use of an independent asset manager liaising between individual owners and developer/rental manager, might facilitate aligning communication and so ultimately understanding and different stakeholder interests. An independent asset manager would provide the needed external perspective to the hotel results and can act as the bridge between individual asset owners and developer /operator. In independently monitoring the various aspects of asset management, such as monitoring the operational performance, reviewing budgets and capex, assessing compliance with operating agreements and reviewing industry trends that may affect the project – a strategic guidance, but moreover transparency is created with the ultimate goal of minimally sustaining or even better – exceeding fair market value.

Besides the above appointment, I would also advocate that in order to avoid an inkling of bias in allocating costs, that not just condominium reserve funds and cash streams, but also the financial administration of the condominium is outsourced and so clearly separated from the “hotel” operations accounts.

3) Marketing & Communications: Product positioning would need to focus on the lifestyle purchaser rather than investor. Reality has shown that due to a destination’s seasonality, a net cash flow is only feasible for 3 or 4 months of the year.  Educating individual owners on yield/revenue and channel management and consequences of owning in a residential condominium resorts are a constant, arduous task. Individual owners tend to focus largely on and query about their net rates. It is not an easy task to explain principles of revenue management, the net rate differences in segments, markets and on channels – even under a rate parity or integrity approach – , and not to mention the build-up hotel packages to compete and serve segments effectively, house-use or marketing rates. An owner just sees his net rate dwindle, whilst at times keenly aware of the gross selling rate out there in the market. In addition residential resorts in “generalistic” terms do compete on a product level with normal hotels within their rating classification, but are marketing the product with half the disposable return, which either forces them to be quicker on their feet and spend their marketing dollar at least twice as smart or owners need to accept that growth and so returns develop at a slower pace.

4) Rental Management Agreement: From the start management needs to create a strong case for the reinvestment of funds and to align it with the non-financial wants and needs of owners and initially driving occupancy rather than rate to create momentum and direct value in the asset. Easier from the on sought than in hind sight though. Terms need to consider for instance a 10 year horizon, instead of on-request or annual, 3 or 5 year contracts, with the related uncertainty on the size of the rental inventory.

Here, rental managers are compensated through a straight rental revenue share. However, similar to modern hotel management agreements compensation should be linked to GOP, benchmarked RevPAR (more difficult to obtain, as benchmark data just tend to be available for hotels) and possibly even cash flow result.

In addition, both the “hotel” and condominium P&L need to merge, as interests are largely intertwined – also facilitating the collection of outstanding condominium dues – a common issue in most resort developments- affecting maintenance, operational returns and asset value. Sufficient working capital needs to be provided by the individual owners upon approval of the various budgets in the Annual Assembly, whilst pay-out to the individual owners only occurs when particular cashflow levels are met in order not to risk sustainable growth of the project, whilst reversly short falls also need to be met by the owners of the rental assets.

Feel free to comment underneath and connect on LinkedIn.

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2 Responses to The Future of Residential Tourism – Part 2

  1. Rui d'Ávila says:

    you’ve raised a set of issues that should make every developer think about, before entering into a venture such as developing a touristic resort. Our business plans have to be reshaped and please forget the short term analyses (not you of course)! One should always consider, say, 15 years of cashflow, if the return analyse is to be considered correct.
    With respect to the issue of the rent inventory on behalf of the developer and the unfair competition, well, I’ve seen resorts where profits are distributed among every participant of the rental pool, no matter if your unit has been rented or not; does this make sense and can be a response to that specific problem?

    • marcsontag says:

      Hi Rui, indeed that suggestion would work.

      I already mentioned the more transparent approach of the P&L model – similar to hotel management contracts.

      Here, not just profits, also losses and cash flow problems are “shared”, although ultimately the responsibility of the asset holder. The asset manager would be remunerated through incentives on revenue (to a lesser extent) and more on raising gop, cashflow levels and possibly ratchet returns through increased asset values versus fair market value as a result of a succesful rental program. Cheers and once again thank you for commenting. Um abraço.

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