SINGAPORE, 4 September 2024: Hotel management agreements are increasing in duration, and while management fees have decreased in the past five years, sales and marketing fees have increased across Asia Pacific.
These are some of the findings of the Hotel Management Contract Survey 2024, commissioned and published jointly by JLL and Baker McKenzie. They 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 in the Asia Pacific, comprising 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. In the Maldives and Japan, at 26 and 23 years, respectively, there are more 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 the increase in the fee makeup. According to the survey, the average base fee in contracts has declined 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 for operators to perform. An optimally negotiated management agreement aligns the interest of the hotel owner with the operator through rewarding outperformance,” says JLL Hotels & Hospitality Group, Asia Pacific Senior Managing Director Head of Advisory & Asset Management, Xander Nijnens.
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 charge sales and marketing fees of 3% or more of either Rooms Revenue or Total Revenue.
“There has been clear progress on curtailing management fees, but increases in sales and marketing, programme fees, and variable hotel costs are increasingly offsetting these drops. From our interactions with the market, these fees tend to be seen as mandatory, less transparent, and less straightforward to compare across brands, causing some concern with owners,” says Nijnens.
Furthermore, a significant shift observed in the past 20 years is the inclusion 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, generally over two consecutive years.
