What are branded residences?

Article written by Lourdes Barriuso, lawyer in real estate law at Barriuso Legal

In the heat of the hotel investment boom, a new hotel investment product is rapidly developing in Spain: serviced apartments, called branded residences in the luxury segment.

This "asset class" is currently taking off in Spain. Branded residences are expected to grow "exponentially", exceeding 1,200 units in 2027, according to the consultancy firm Colliers. They operate in urban areas, i.e. large cities popular among tourists (i.e. Madrid, Barcelona,...) and holiday resorts (i.e. beach or golf resorts in Malaga or the Canary Islands).

What are serviced apartments or branded residences?

Serviced apartments are flats with hotel services, and branded residences will be offered under a hotel or luxury brand.

The purchaser of the flat (investor) reserves up to a maximum of 60 days a year for it to be used, and the rest of the time is assigned by means of an accommodation contract entered into by the hotelier on behalf of and for the benefit of the investor. The apartment users will be able to enjoy basic amenities or services plus other additional services, to be agreed and paid for separately, provided by the hotel.

Three parties are therefore involved in this legal relationship: the developer, who develops land or renovates a building for hotel use; the investor, who buys the serviced apartment; and the hotel operator or manager, who provides the hotel services in the hotel and apartments (under a hotel brand or luxury brand in the case of branded residences).

What are serviced apartments not? How do they differ from other flexible formulas?

They are not tourist apartments or flexible medium or short-stay apartments because serviced apartments are managed by an operator that provides the end user (client) with hotel services within the scope of the hotel management under the terms of an accommodation contract.

Nor is it a case of time-sharing because although the investor reserves a period of time for its use, the owner has 100% of the freehold and cedes its use to third parties when they are not using it.

They are very similar to "condo hotels", which are regulated by Balearic regulations. The condo hotel is a horizontally divided hotel because its "accommodation units" belong to different owners. In Serviced Apartments, the hotel is not horizontally divided, and the apartments (or villas) do constitute separate registry units as they belong to different owners.

Why are they so successful?

In Spain, serviced apartments are proving attractive to private investors - many of them foreign - who wish to enjoy a second (or third or fourth) residence while participating in the hotel investment boom.

This formula will be successful if it has advantages or "added value" for all parties. The developer of land for hotel use or renovator of an asset suitable for hotel use includes this type of apartment in their product mix to reduce the risk and increase their project's profitability (the hotel brand will allow them to sell the flats at a higher price) and in turn, reduce the need for financing (as the sale of the apartments will reduce the financial debt). The investor who buys one or more apartments also expects to obtain higher profitability with the operation by an expert hotel operator under a reputable brand (Branded Residences). The hotel operator obtains a more extensive and flexible product mix, which contributes to improving its results.

What are the planning requirements for developing serviced apartments?

For the apartments to be exploited for hotel purposes, they can be located either in the same building as the hotel or in the immediate surroundings (i.e. villas of a golf resort) so that the hotelier can operate them alongside the rest of the hotel. In either case, the land or building where the apartments are located must be suitable for tertiary use (hotel, tourism) and not exclusively for residential use.

How are the legal relationships between the parties contractually arranged?

Relationship between the developer and the operator and/or brand

In the initial phase of the project, the promoter and operator will enter into a collaboration contract that includes the provision by the manager of marketing and marketing consultancy services regulating the use of the brand. In addition, the manager's collaboration also includes technical advice on the design with supervision of the execution to ensure that it complies with the brand's requirements. 

Once the execution of the work and decoration has been completed in line with the standards defined by the brand, the parties will sign the pre-opening and management contract.

Relationship between the developer and the investor

During the construction phase, the developer and investor enter into a private sale agreement. Once the construction work is completed, the parties execute a public deed to transfer the ownership and possession of the apartment, with the payment of the remaining amount.

The investor, in turn, will enter into a management contract with the hotel operator so that the latter can operate the flat for their benefit in exchange for a management fee.

Normally, for renowned international brands, the hotel manager has a model contract with unchangeable conditions to which the investors (each investor or the Community of owners) adhere with no greater capacity for negotiation. These contracts do not guarantee a minimum return to the investor but are subject to fixed and variable fees (depending on occupancy and price) that incentivise the hotelier.

Relationship between the investor and the user

The end user (client) will enter into an accommodation contract with the investor through the operator, who will receive payment and pay the investor the corresponding part of the price, net of deductible expenses and fees.

In short, serviced apartments are an attractive real estate investment product but are complex from a legal point of view because their design, development and management of are also complex. A contractual regulation is needed from the project's initial phase, which correctly aligns the rights, obligations and responsibilities of the developer, the investor and the hotel operator or brand.