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Hotel management agreements in Asia Pac see increase in duration, finds JLL

  • HOTELSMag.com
  • 3 September 2024
  • 3 minute read
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This article was written by HotelsMag. Click here to read the original article

Hotel management agreements (HMAs) in the Asia Pacific region have been seeing an increase in duration, with the initial term of HMAs increasing by four years on average since 2005 to touch 17.4 years this year, a recent JLL survey has found. Regional operators, however, usually tend to have a shorter term and preference for more flexibility.

While management fees have reduced in the last five years, sales and marketing fees have spiked across the region, according to the latest Hotel Management Contract Survey commissioned and published jointly by JLL and Baker McKenzie. This year, the analysis included 145 hotel management contracts signed between 2018 and 2023, the largest sample so far in Asia Pacific.

The length of HMAs is not the same across the region and varies as per market, with the Maldives and Japan recording 26 and 23 years respectively, where there are more luxury hotel developments and owners want to lock in brands for a longer period of time. Meanwhile, in Australia, the practice is more customized to shorter agreements, averaging at 15 years as owners lean towards shorter terms and unencumbered asset sales.

A significant factor which influences HMA duration is the make-up of fees. The survey found the average base fee in contracts to decrease to 1.6% of revenue from 1.7%. Incentive fees are increasingly based on a slipping scale based on performance versus gross operating profit thresholds.

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Hotel management agreements in Asia Pacific now average 17 years.

Hotel management fees has lowered in most markets in the region and fees are increasingly linked to results against agreed performance thresholds, which offers more incentives to operators to perform.

“An optimally negotiated management agreement aligns the interest of the hotel owner with the operator through rewarding outperformance,” said Xander Nijnens, senior managing director, head of advisory and asset management, JLL Hotels & Hospitality Group, Asia Pacific.

Sales and marketing fees have increased even as management fees have declined. Compared to the previous years, a higher volume of operators is charging sales and marketing fees at 3% or more of either rooms revenue or total revenue, the survey found.

Although management fees have been curtailed, these declines are increasingly being offset by increases in sales and marketing, program fees and variable costs to the hotels, Nijnens said. “From our interactions with the market, these fees tend to be seen as mandatory, less transparent and less straightforward to compare across brands, which is causing some concern with owners.”

Additionally, a significant shift that has been noted in the past 20 years is the inclusion of performance termination provisions in management contracts. About 90% of contracts now including this clause, the survey found. These are usually based on two performance tests — against RevPAR performance of a competitive set and GOP performance against budget and generally over two consecutive years.

“It is clear that not all performance termination provisions are created equally, and it is critical to get into the detail of the mechanism and thresholds to ensure there is a real option to terminate when the operator is not performing,” said Sebastian Busa, head of commercial real estate in Australia and co-chair of the Asia Pacific practice, Baker McKenzie.

In the coming years, owners in the Asia Pacific are expected to have more diverse operating models compared to standard hotel management contracts, with franchise, manchises (a type of hotel management contract that contains the right for the party — usually the hotel owner — to convert the HMA into a franchise agreement) and white label operators getting further traction.

Three new themes are expected to emerge in the next decade that will impact HMAs in the region:

  • Increase in alternative operating models: Growth in traction of white label operators, direct franchises and prospective manchises.
  • Sustainability influence: Sustainability will increasingly be embedded and legislated into contracts by owners and operators.
  • Room for termination: Higher liquidity and hotel sales can add considerable premium on vacant possession assets.

As hotel markets across the Asia Pacific mature, owners are increasingly becoming savvy in their management contract negotiation and critically considering their branding and operating models.

“Looking forward we expect this to bring more flexibility into management contracts, we anticipate more ESG provisions and more termination options to optimize the value of hotels,” Nijnen added.

Please click here to access the full original article.

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