Key takeaways
- The brand premium must be compared with the full set of costs: royalty, upfront fee, higher specification, marketing, SBT and long-term obligations, not with the royalty alone.
- In the example, a 20% premium still gives a slightly negative incremental NPV. Break-even is at about 20.13%.
- You must be able to say who bears the long-term service and brand fees, on both the developer's side and the buyer's side, because they come back to affect resale prices.
Units sell at better prices than neighbouring projects because of a hotel-grade brand name. Everyone in the meeting room is happy with the incremental figures, but going back to read the contract reveals royalties, service fees and terms running for decades. A branded residence is like a restaurant franchise: the famous name helps sell, but the share must be paid continuously. The question is therefore not whether the brand lets you sell at a higher price, but how much of the higher price is left after deducting everything, at the time it is actually paid.
Treat it as an incremental project
Build the project model without the brand as the base case, then calculate only the cash flows that change when the brand is added. This shows whether the brand creates added value, without it being masked by the project's own returns.
| Benefits | Costs |
|---|---|
| Higher selling price | Royalty on sales, which may be calculated on total project sales, not only the premium portion |
| Possibly faster sales, if there is evidence | Upfront fee and brand consultancy fees |
| Credibility with overseas buyers | Specification work to brand standards, service areas and pre-opening funds |
| Additional marketing, and taxes arising from the higher sales base, such as SBT and commission | |
| Long-term obligations, such as service fee guarantees or early-stage support |
Do not use a premium from a market report in place of a project study. Brands, locations and competitors differ. The figure used should come from comparing actual prices after discounts, adjusted for product quality.
Example: 8,000 sq m
Hypothetical example Figures in THB million. Saleable area 8,000 sq m. Unbranded price 150,000 THB/sq m, or 1,200. Assume a 20% premium and a royalty of 5% of total sales, paid as cash is received. Upfront fee of 15 in year 0. Additional specification of 12,000 THB/sq m = 96, spread over 3 years. Additional marketing of 1% of total sales. Commission and SBT apply only to the premium portion, at 3% and 3.3%. Cash received is 10%, 10% and 80% in years 1–3, and the developer supports service charges of 2 a year for 10 years after transfer. CIT of 20% in year 3, discount rate of 12%.
| Item at 20% premium | Amount |
|---|---|
| Total premium | 240.00 |
| Royalty 5% × 1,440 | (72.00) |
| Upfront fee | (15.00) |
| Additional specification | (96.00) |
| Additional marketing | (14.40) |
| Additional commission | (7.20) |
| Additional SBT | (7.92) |
| Service charge support over 10 years | (20.00) |
| Incremental profit before CIT | 7.48 |
| CIT 20% | (1.50) |
| Incremental profit after CIT | 5.98 |
| Premium | Incremental profit after CIT | NPV at 12% |
|---|---|---|
| 15% | (36.11) | (31.96) |
| 20% | 5.98 | (0.80) |
| 25% | 48.08 | 30.36 |
| 30% | 90.18 | 61.52 |
The NPV break-even point is at a premium of about 20.13%.
Where incremental profit is negative, it is assumed to be offset against the project's other profits, so CIT is positive in cash flow terms.
A 20% premium looks very good when you look at sales, but in this example the THB 240 m premium leaves only a few million in profit and a slightly negative NPV. The heaviest items are the royalty, which is calculated on total sales, and the specification set by the brand. Conversely, if the premium rises to 25%, NPV increases by a further THB 31 m or so, so time is better spent proving the premium than negotiating small items.
The buyer's side: long-term costs
Hypothetical example A unit priced at THB 12 million with a 20% premium = THB 2.4 million. If the owner pays additional brand and service fees of THB 120,000 a year for 40 years, the present value at 8% is about THB 1.43 million. The buyer therefore pays an economic brand cost of about THB 3.83 million in total.
If the services or the brand do not improve rental income or resale prices enough, the next buyer will deduct this amount from the price. This affects the developer's reputation even after the units have sold out. The rental pool and accounting issues should be analysed separately.
What to read in the contract
- The royalty base: bookings, contract price or cash actually received, and how buyer cancellations are handled
- The contract term, renewal, termination conditions, and the effect on the project name after termination
- The scope of brand use in marketing, especially statements about guaranteed returns
- Standard-setting, specification changes, and changes in co-owners' costs
- Who is liable when service charges fall short: the co-owners, the operator or the developer
- Applying VAT and withholding tax (WHT) to royalties when paid to an overseas recipient
Next steps
- Build the model with and without the brand, using the same assumptions
- Keep evidence comparing prices of branded and unbranded projects, after discounts and quality adjustments
- State the base on which royalty is calculated and when it is paid, then put it in the cash flow
- Calculate the break-even premium before negotiating the contract
- Simulate the buyer's long-term burden, and test whether rental income or resale prices can support it
- Have lawyers and tax advisers review the brand contract terms before signing