Hotel management agreements in Asia Pacific now average 17 years

SINGAPORE, 3 September 2024 – Hotel management agreements (HMAs) are increasing in duration and while management fees have decreased in the past five years, sales and marketing fees have increased across Asia Pacific. The major findings of the Hotel Management Contract Survey 2024, commissioned and published jointly by JLL (NYSE: JLL) and Baker McKenzie, show that the initial term of HMAs increased by four years on average since 2005 to reach 17.4 years in 2024, however regional operators generally have a shorter term and an appetite for more flexibility.

The 2024 Hotel Management Contract Survey represents the most comprehensive study of its kind in Asia Pacific, comprising of approximately 400 hotel management agreements (HMAs) analysed over the past 20 years. This year’s survey also included 145 hotel management contracts signed specifically between 2018 and 2023, the largest sample yet in Asia Pacific, to contribute to the 20-year study.

According to respondents, the length of HMAs does differ by market with Maldives and Japan at 26 and 23 years respectively, where there are a higher number of luxury hotel developments and owners prefer to lock in brands for longer. Furthermore, practice in Australia is more tailored to shorter agreements with an average of 15 years as owners prefer shorter terms and unencumbered asset sales.

One factor influencing the duration of HMAs is increasingly the make-up of fees. According to the survey, the average base fee in contracts has come down to 1.6% of revenue from 1.7%. Incentive fees are increasingly based on a sliding scale based on performance against gross operating profit thresholds.

“In most markets we have seen hotel management fees come down and increasingly fees are linked to results against agreed performance thresholds, which creates additional incentives to operators to perform. An optimally negotiated management agreement aligns the interest of the hotel owner with the operator through rewarding outperformance,” says Xander Nijnens, Senior Managing Director, Head of Advisory & Asset Management, JLL Hotels & Hospitality Group, Asia Pacific.

Despite a decline in management fees, the survey affirmed that sales and marketing fees have increased. Compared to previous years, a higher proportion of operators are charging sales and marketing fees at 3% or more of either Rooms Revenue or Total Revenue.

“There has been clear progress on curtailing management fees but increasingly these drops are being offset by increases in sales and marketing, program fees and variable costs to the hotels. 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,” says Nijnens.

Furthermore, a major shift observed in the past 20 years is the including of performance termination provisions in management contracts with 93% of contracts now including this clause. These tend to be based on two performance tests: against revenue per average room (RevPAR) performance of a competitive set, and gross operating profit (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,” says Sebastian Busa, Head of Commercial Real Estate in Australia and Co-Chair of the Asia Pacific Practice, Baker McKenzie.

In the years ahead, JLL and Baker McKenzie predict that owners in Asia Pacific will have a more diverse set of operating models compared to standard hotel management contracts, with franchise, manchises and white label operators getting further traction.

According to respondents, three major new themes will emerge in the coming decade that will impact HMAs in Asia Pacific.

• A rise in alternative operating models: Growth in traction of white label operators​, direct franchises, and potential manchises

• Sustainability influence: Expect to see sustainability increasingly embedded and legislated into contracts by owners and operators.

• Room for terminations: Higher liquidity and hotel sales could put a significant premium on vacant possession assets.

“As hotel markets in Asia Pacific mature, we are seeing owners become increasingly 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 optimise the value of hotels,” says Nijnens.