The Asia Pacific hospitality industry is witnessing a shift in the landscape of hotel management agreements (HMAs). A new report by JLL and Baker McKenzie, the 2024 Hotel Management Contract Survey, reveals that HMAs are experiencing longer durations, with a notable increase in sales and marketing fees across the region. While management fees have decreased in the past five years, the average contract duration has extended to 17.4 years in 2024, a four-year increase since 2005.
This survey, based on data from nearly 400 HMAs analyzed over the past two decades, including 145 contracts signed between 2018 and 2023, provides a comprehensive view of the region’s HMA landscape. Notably, the length of HMAs varies by market. Destinations like the Maldives and Japan, known for their luxury hotel developments, average 26 and 23 years respectively, as owners prioritize securing renowned brands for extended periods. Conversely, Australia favors shorter agreements, averaging 15 years, reflecting owners’ preference for greater flexibility and the option for unencumbered asset sales.
The structure of fees plays a crucial role in determining the duration of HMAs. The survey found that the average base management fee has decreased to 1.6% of revenue from 1.7%. However, incentive fees are increasingly tied to a sliding scale, contingent on performance relative to gross operating profit thresholds. This shift in fee structure aligns the interests of both hotel owners and operators, encouraging operators to prioritize performance for greater rewards. “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 the reduction in management fees, the survey highlights a significant increase in sales and marketing fees. Operators are now commonly charging fees at 3% or more of either Rooms Revenue or Total Revenue, a substantial increase compared to previous years. “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,” adds Nijnens.
A notable shift observed over the past two decades is the widespread inclusion of performance termination provisions in management contracts, with 93% of contracts now incorporating this clause. These provisions typically involve two performance tests: one assessing revenue per available room (RevPAR) compared to a competitive set, and the other evaluating gross operating profit (GOP) against budget, usually over a consecutive two-year period. “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,” explains Sebastian Busa, Head of Commercial Real Estate in Australia and Co-Chair of the Asia Pacific Practice, Baker McKenzie.
Moving forward, JLL and Baker McKenzie anticipate that hotel owners in the Asia Pacific region will explore a broader range of operating models beyond traditional hotel management contracts. Franchise agreements, manchises, and white label operators are expected to gain traction as owners seek greater flexibility and control. The survey respondents identified three key themes likely to shape HMAs in Asia Pacific over the next decade:
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Evolving Negotiation Dynamics:
As hotel markets in Asia Pacific mature, owners are becoming increasingly sophisticated in their management contract negotiations, carefully considering their branding and operating models. This trend is expected to foster greater flexibility in management contracts, incorporating more ESG provisions and termination options to optimize hotel value.*
Performance-Driven Contracts:
The focus on performance-based contracts will continue to gain momentum, with operators incentivized to achieve specific performance targets. This shift will further enhance alignment between owners and operators, leading to more efficient and profitable operations.*
Emergence of Alternative Models:
The rise of alternative operating models, such as franchise agreements, manchises, and white label operators, will provide owners with greater autonomy and control over their assets. This trend is expected to offer a wider range of options and cater to the diverse needs of hotel owners in the Asia Pacific region.In conclusion, the Asia Pacific hospitality sector is embracing a new era of hotel management agreements characterized by longer durations, evolving fee structures, and a focus on performance. The increased sophistication of owners and the growing prominence of alternative operating models are set to shape the future of HMAs in the region, driving greater flexibility, efficiency, and value for both owners and operators.
