Fulfilling the potential of the risky condotel market

Fulfilling the potential of the risky condotel market

Mauro Gasparotti, director of Savills Hotels APAC, writes on his expectations of the condotel market in Vietnam, and what solutions could be found to ease the situation.
04:00, 14/12/2019
Mauro Gasparotti, director of Savills Hotels APAC.

We have published some white papers over the past few years outlining the pros and cons of condotel products, as well as the risks and opportunities for both buyers and developers.

A condotel is a great product for individuals to own and is attractive for developers. However, both buyers and developers should have a full understanding of this product, which is more complicated in comparison to other real estate assets. Condotels contain residential characteristics to ensure that buyers will identify it as a “second home” product, therefore enriching their comfort when they use it for themselves.

Condotels also consist of hospitality features which need to be designed following hotel models and standards, in order to ensure profitability. Complications occur when the developer is not well prepared to enter the hospitality industry and they are not fully aware of the cash flow implications which stem from the long-term management of condotels.

When these facilities are not properly planned, the product is incorrectly positioned in respect to the market conditions, or if there is a lack of interest by the developer for future management, they could lead to difficulties operating the project in a profitable way.

We prefer not to comment on specific cases. However, as we have been informing the market in the past few years, we would like to note that it is challenging to reach a higher level of guaranteed return when relying on the unit’s rent income.

We believe that 4-6 per cent yields are the right expectations for a sustainable rental return, given that the buyer still enjoys free usage and a potential chance for capital gain in the mid- to long-term, especially for beach frontage or sea view properties.

Also, the buyer should look after their unit, using part of the cash flow to maintain the property, considering that hotels age much faster than residential facilities due to the more intense use. Some developers offer high guaranteed returns, but they have other revenue sources within the project (for example, restaurants or additional room inventory retained by the developer) that are used to support the guaranteed returns offered to buyers.

Several condotels in Vietnam are using these methods and they are sound projects, properly planned, well-positioned and correctly managed. Others are not, and are more aggressively launched to the market without proper consideration to future operations and instead oriented to short-term sales.

We understand that one single case should not become an example of the whole market. However, there is always a risk for projects that have not been properly planned without proper anticipation of the future operation, especially in a period like this when the coastal market performances have slowed due to new openings. On the other hand, buyers should not demand such high rental returns which might affect the maintenance and the quality of building in a long-term run.

Buyers should first buy for holiday usage and a potential future capital appreciation as sea view properties are usually limited, and then they could also have a rental cash flow as additional income. There are many criteria for buyers to consider when purchasing a condotel product.

I would personally investigate the overall quality of the product to see if it matches the price, market conditions, brand, and positioning. A well-balanced product of consistent, clear identity and purpose usually works well, whilst the “try to be everything” products experience difficulties.

A quality condotel does not need to be a five-star product, especially considering that five-star hotels in coastal destinations are usually more difficult to be profitable, but it has to be built with attention to details, considering the right market positioning and good management.

In case of a default on guaranteed return, if the product is operational, there is still a good chance that with proper management (sometimes from third-party operators or brand), the condotel will perform well. Also, a better maintenance programme, often forgotten under guaranteed returns, might ensure future disposal value is protected.

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