Firm Watson Farley & Williams LLP has exclusively shared the first industry survey in the APAC region exploring the third-party operator plus franchise model, revealing some unexpected results.

The industry-first survey procured by Lada Shelkovnikova, Partner, Hotels and Hospitality, APAC and MENA, Watson Farley and Williams, and colleague Robert Williams, Partner, Head of Hotels and Hospitality APAC, Watson Farley and Williams, was conducted at the special request of AHICE to explore the third-party operator (TPO) and franchise model across the APAC region.

The structure is a departure from hotel management agreements with branded operators, which have long been dominant across Asia, the firm noted, adding that the TPO plus franchise segment is “evolving fast”.

“The acceleration is notable not only through the growth of independent operators, but also in how branded operators are adapting to this structural shift,” the survey reports.

“Against this backdrop, we wanted to capture authentic market sentiment – the expectations, concerns, and risk appetite of hotel owners and investors. Our objective was to initiate a deeper dialogue in the industry and to identify how hotel operating models must evolve to better align with the priorities of owners, developers, and capital providers,” Shelkovnikova and Williams advised.

According to the Partners, the survey was carefully structured to highlight the features that owners and investors consider critical to making the TPO model credible, commercially viable and attractive to them, and was conducted on a fully anonymous basis with results reflecting that level of honesty.

“We believe the findings offer actionable insights not only for TPOs and investors, but also for brand owners and franchisors. Every stakeholder in the hotel investment ecosystem should find relevant takeaways,” Shelkovnikova and Williams said.

Survey Demographics

The firm received circa 50 unique responses from hotel owners, developers, and investors, predominantly representing private equity funds, family offices, and corporate groups. From this pool, 99% operate or invest in Southeast Asia and/or Oceania, around 20% of all respondents operate and invest in East Asia, including Japan, China, Korea, and Hong Kong, and approximately 15% of all respondents are also active in the Middle East.

Market Sentiment: TPOs are no longer niche

The survey questioned the rise of independent hotel operators, finding that less than 5% expressed no interest, whilst the vast majority welcomed the TPO model as an additional strategic option.

According to the Partners, the survey found that “TPOs are not confined to a niche and that their growth trajectory demonstrates applicability across asset classes: CBD, resort, branded, unbranded, regional, and beyond”.

Questioning what the strategic rationale is for separating the brand from day-to-day hotel management, respondents said the primary drivers were to retain greater owner control while leveraging a global brand, driving improved GOP/GOP margin, and tailoring operations to meet local market dynamics.

“In essence: profitability through greater focus and flexibility,” Shelkovnikova and Williams said.

Regarding how much operational control hotel owners would want to retain under a TPO model, respondents were decisively in favour of control. 37% of owners said they were expecting a high degree of operational control, while 37% favour structured controls similar to a well-negotiated HMA (budget approval, control over big-ticket spending and key personnel appointments). Meanwhile, 26% prefer control embedded through fee structures rather than operational intervention. The results showcase that owner’s control remains central to the TPO value proposition.

Alignment of TPO model with owner’s long-term investment strategy

The most important features to align the TPO model with long-term investment strategy were found to be through fee structures needing to be aligned with owner outcomes, moving away from traditional base, plus incentive models, and exit flexibility, including the option to terminate without cause on short notice for a fee.

“When asked about sharing incremental asset value on exit, owners demonstrated that they are not yet prepared to share upside. The answer might be different if the TPOs were to contribute capital, for example to capex programs,” Shelkovnikova and Williams remarked.

“We are not yet seeing significant departure from the base and incentive fee model, though deal terms do show a bias to incentive, with TPOs and owners counting on the desire and ability to drive better GOP.”

Other survey findings included how the TPO plus franchise model demonstrably enhance GPO, NOI or IRR, which found there to be some scepticism amongst owners as to performance uplift vis-à-vis a classic HMA, the Partners noted.

The results found that only 21% see only marginal improvement and 28% see no clear impact, together almost 50% of respondents expressing doubt.

The remaining 50% believe TPOs can drive superior returns through leaner operations and more focused management, particularly in revenue optimisation, the survey noted.

“The likely outcome: performance will ultimately be determined not by the model itself, but by the quality of the operator,” Shelkovnikova and Williams remarked.

Brand Standards: A point of friction

When asked about TPO’s role in compliance with franchisor’s brand standards, the survey found 72% of owners show sensitivity to brand standards compliance and state that TPOs are less likely to push refurbishments or CapEx that will not deliver the ROI for the owner. A majority of respondents favour TPO alignment, particularly where it avoids non-ROI-driven capex.

The survey found 16% saw a heightened risk in luxury and upper-upscale segments, which could mean luxury may be slower to fully transition toward franchising in the region.

When questions about the importance of the proposed TPO having proven experience with a specific brand, more than 75% of respondents indicated that direct experience with a specific brand is not critical, provided the TPO has worked with franchisors of comparable calibre, though our experience shows that familiarity with franchisor’s systems, and leverage with a brand partner, are important differentiators when comparing TPOs.

“Core capabilities, particularly asset management and revenue management, are seen as transferable,” Shelkovnikova and Williams noted.

“Importantly, experienced TPOs may secure stronger franchise terms than owners acting independently, leveraging established relationships across commercial terms, procurement, marketing, revenue management, refurbishment cycles and exit strategies.”

Questioning how resilient the TPO plus franchise model is during market downturns or ramp-up periods as compared to classic branded HM arrangements, more than 60% of respondents believe the TPO plus franchise model to be more agile, particularly in cost control.

“The COVID period reinforced this view, and with current uncertainty in the Middle East and the wider impacts of the conflict, we are perhaps about to experience another test of that. Large operators under traditional HMAs in some cases struggled to maintain asset-level focus, with strained owner relationships exacerbated by a challenging financial situation. TPOs operate directly for the owner and should be more aligned with GOP delivery, prioritising more disciplined cost management, especially during downturns and ramp-up periods,” Shelkovnikova and Williams remarked.

The expectations in terms of ability to terminate a TPO without cause were split into two camps, with nearly half accepting no termination without cause, relying on performance tests, and 37% favouring termination without cause on short notice.

“While attractive for flexibility, termination without cause may undermine operator commitment and long-term alignment. It is also increasingly r...

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