This is a rather popular strategy of investing in real properties found in many countries. A private investor acquires a condominium at a hotel and formally becomes a co-investor of a hotel project, enjoying full rights. Later on the owner may reside in this apartment or let it out as a regular hotel room in his or her absence. In Russia this development and management scheme is in embryo; yet condos are quickly becoming the talk of the day.

The condo hotel is a hospitality property comprising separate residential units sold to private investors. Thus each of the landlords owns a separate room, apartment or studio while the management of the entire complex is trusted to a branded hotel operator.

Condo hotels are most widespread in America and Southeast Asia. However the interest in this format has woken of late and the concept of condo hotels is being widely discussed.

On the whole, this concept can hardly claim absolute newness. Management companies, offering services to private owners, operate at all resorts: they are willing to lease out their apartments or villas for the time, when they do not dwell there themselves. However it is the condo hotels that specialists consider the most effective scheme of getting rental income, since a real property is managed by a world-renowned hotel operator, rather than a local company. The management company delivers the landlord from any headaches related to property running. This is all the more urgent for properties purchased abroad.

Investors, buying residential units at a condo hotel, pursue several goals. For the first thing, they minimize the risks related to obtaining rental income in the future, as a well-known hotel operator will do everything possible for an apartment to be in demand with “potential audience” and professionally run. In addition, investors acquire properties on the rising market. Besides anything else, they enjoy full rights of owning real estate, which they can also use as their own vacation residences. The right of living in apartments a fixed number of days or weeks in a year is settled on landlords. In the remaining time (of absence) those units are leased out by a management company and the profit is shared as per the specified scheme,” says Marina Usenko, senior vice president at Jones Lang LaSalle Hotels. For all that, the condo ownership does not impose any legal burdens on the further deals with a given apartment. This is a legally fostered right of ownership, which can be mortgaged or sold to a third party.

Condo hotels are an effective financial scheme minimizing the risks of developers. Selling some of the rooms, they raise funds for project completion. “This refers, above all, to the sale of large hospitality complexes with advanced infrastructure, which call for considerable financial outlay,” says Marina Smirnova, alternate director of the consulting department at Colliers International. Incidentally, first condo hotels appeared in those regions, where serious risks related to seasonal fluctuations of the demand were involved in the hotel construction.

In terms of layout residential units in a condo hotel are notably distinct from single hotel rooms. They are either spacious studios or multi-room apartments, where it is quite comfortable to live for a long time. In many projects the apartments of the owners who plan to live permanently or a long time at a condo hotel are quartered in detached blocks or stories. In a mixed case a real property functions both as a condo hotel and a regular hotel. Private apartments are then accommodated on upper floors.

Other options available at a condo hotel are in no way different from those at a common hotel. In particular, they always feature public areas, such as a reception lobby, restaurants and cafes, pools and suchlike. As estimated by experts, it is the extra services that bring the main profit to an operator.

Trust but Check!

On the whole, the scheme of creating a condo hotel looks as follows: the developer builds a real property and hands over the right of ownership to private landlords who, in their turn, sign a facility management agreement with a condo hotel operator. The term of such a contract may range from 5 to 20 years. “This agreement stipulates the obligations of the management company related to property maintenance and running, its responsibility for all expenditures and costs, the amount of remuneration, the profit distribution scheme and the terms of ownership assignation,” says Ms. Usenko. After all rooms (units) in a condo hotel have been sold, the builder may pass the property to a management company.

A transparent and fair structure of remuneration payment ought to be devised, to provide for the mutually beneficial cooperation between developer and management companies. This can be a fixed rental rate paid by an operator to a landlord or property management recompense figured pro rata the obtained income. “The latter scheme allows for the payment of a higher percentage of total revenues obtained per room. An operator is often entitled to the entire profit from selling foods and drinks,” says Marina Usenko.

If a landlord wants to use an apartment for his or her personal ends, the operator must be notified beforehand (30, 60 or 90 days in advance depending on the season), or the landlord risks staying outdoors: the rooms in the condo hotel are offered on a first-served basis. Landlords normally use the services of condo hotel either free of charge or at face value. Anyway the landlord incurs the operating costs related to running a residential unit, since they are accumulated regardless of who uses the room.

Hotel operators readily sell the services of residential property management. Their logic is rather simple: potential buyers are willing to overpay if their apartment is operated by a world brand rather than a local player. Notably, both world-renowned brands and pigeon-holed operators are active on this market.

Heading for Cities

Condo hotels are generally located in resort areas. However developers tend to deliver more of such projects in large cities like London, Paris, Madrid etc. They are interested in mega-cities both from business and cultural perspectives. As noted by the experts, potential landlords show great interest in such projects. “Centrally located condo hotels attract such well-known operators as Pierre & Vacances, Guestinvest and Galliard,” says Ms. Usenko. “Furthermore the capitalization of urban hotels is much higher, which promises a higher return to investors in case of resale. On the other hand, it’s difficult to figure out those parameters for projects situated in resorts.”

It could well be surmised that Moscow might become a good market for this type of investment. Foreigners working in the capital could be the potential audience of Moscow-based condo hotels — they would be more willing to dwell in apartments run by a well-known hotel operator than at regular private apartments.

Underdeveloped Market

As estimated by the hospitality market experts, there is not a single completed condo hotel in Russia, though the interest in this format keeps mounting. Developers are mostly attracted by a financial scheme allowing them to use private equity funds. “They consider it an easy financial strategy close to shared construction costs,” says Ms. Usenko. “You raise the money, build a hotel, turn it over for operation and recoup your project. Everything is not so simple here, though. We have not yet elaborated the legal basis regulating the rights and obligations of all condo hotel stakeholders, so I consider it a risky affair to invest in this real estate segment.”

An apartment bought at a condo hotel cannot be set aside in waiting for a surge of prices, as is often the case with newly built projects. It must be put into operation at once and bring profit to both the landlords and the hotel operator. “The condo hotel is co-investment in a joint venture with a single concept, and most private investors are absolutely unprepared to run such a business,” assumes Marina Usenko. “This is why a respective legal basis is needed, which would discipline all the participants.”

“This format works on developed saturated markets within a distinctly delineated legal field, while the Russian market has not matured enough for this type of property to be in demand,” believes Sergey Lysenkov, principal of the management company Azimuth Management Group. “Condo hotels generally fall under the premium class. This service is rendered by the Aman resort, Banyan Three chain. Another example is a certain sheikh who transformed his residence into a boutique hotel in cooperation with Stein Group.”

There is convincing evidence that the condo hotel concept is workable only on mature markets. Thus Hilton gave up on its operations in this segment. “Most likely, they burnt their fingers on Brazilian projects,” believes Ms. Usenko. “Many developers were excited about the idea of creating condo hotels in Sao Paolo, but the results of such investments were frustrating. Buying up everything they could, private investors ignored the fact that the involvement in a condo hotel was binding. Eventually some of them simply refused to hand in the maintenance money.”

Many experts point out that condo hotels have something in common with serviced apartments, and we’ve already gained some experience in this area. In the opinion of Marina Smirnova, Katerina Alpik built in Krasnaya Polyana, Sochi, became the first residential complex based on the principle of shared real estate ownership in Russia. This property is managed by an operator affiliated with Yumako Group. As reported by the elite real estate agency, IntermarkSavills, a landlord buying an apartment in this project may use several schemes of dealing with the operator: leasing his property out to the operator and handover for asset management for the term of 1 to 3 years. The first scheme implies the obtaining of guaranteed but small earnings. In the second option you get a certain percentage of the profit raised by granting the property on lease. This percentage can be as high as 70%, according to IntermarkSavills.

Interestingly enough, this project is implemented on the residential real estate market, rather than the hospitality market (the project authors position Katerina Alpik as “a club-type elite community offering brilliant opportunities for all-season mountainous and seaside recreation). “Therefore the buyers of apartments at Katerina Alpik simply do not associate this complex with a hotel,” says Ms. Smirnova. Nowhere is it mentioned that the landlords are bound to lease out their apartments in periods of absence, in keeping with the ubiquitous practice. The lack of commercial activities will not allow this complex to generate sufficient funds for the operator upkeep, so it can be predicted that the landlords may face a number of problems in the future related to the facility management.”

In addition, Ms. Smirnova opines that questions may arise about the generation of management and operating expenses. The landlords will seek minimization of these sensitive payments and may altogether give up on the services of the management company. It can also be predicted that condo hotels will cost exorbitant amounts of money on the Russian market, and no mechanisms for real estate hire-purchase will be introduced. This will shrink the market of potential consumers and raise financial risks. Yet these are only conjectures…