If you are thinking about buying a Hotel: this Guide is for you!

Buyer’s criteria

Not only distressed hotel properties are seen as “good buys”, but an appropriate selection of hotels for an investor also has to meet their needs, a correct market price, and has to be profitable in the long term. Prices per room involve several variants, to choose an adequate investment one has to consider all of them.

Meeting the buyer’s requirements

Hotel investors vary on their profile, some are more driven to generate an income, others to benefit from capital growth. The majority of them are investing in hotels to ensure capital security and many operators tend to have hotels in different locations to diversify their offer to customers.

The remaining criteria for a ‘good buy’ are ‘reasonably priced’. This is often construed to mean cheap, or good value. However, the real meaning is that the risk/reward relationship is favorable to the buyer, meaning that the rewards outweigh the risk.

To understand the dynamics of this equation, it is important to first identify the potential risks and then ensure that the yield adopted adequately reflects the risk associated with the purchase.

Yield selection for investments

Determining the correct yield with which to value a property investment is fundamental in assessing the value. As such, each investment needs to be assessed on an individual basis, drawing from the most similar types.

Depending on the investor is more likely that they look for a lease than a management contract. Management contracts in unproven markets tend to attract softer yields than in traditionally strong markets with strong underlying property values. The tenant will have a major impact on the yield that will be applied to an investment.

The financial standing of a company is often reviewed through various rating agencies, they provide risk assessments, which the investment market uses when assessing how desirable a tenant is likely to be.

Other factors like the quality of the operator, their suitability for the operation of the particular unit, their track record, and the market perception of the operator will also have an impact on the market yield for such an investment.

Vacant possession properties

It is likely that the market will consider many factors when deciding what multiple of earnings to pay. Everything that could have an impact on the profitability of the hotel and/or future growth in the capital value is likely to have an impact on the appropriate yield.

The so-known expression: location, location, location is more important than ever for hotels, as well as the type of property, the quality, and the condition of the property. In regions where the hotel market is particularly booming, then the number of new entrants to the market trying to gain a foothold will increase competition.

External factors in favor of a certain location, a new airport, and local infrastructure investments drive an underlying growth in the value of the property. When there are opportunities to improve the trading of the property through redevelopment, extensions, or repositioning the property in the marketplace, then profitable investments are likely to take place.

The historic trading profile of the property is crucial for the analysis. In many cases, the more stable the trading history, the more accurate the yield adopted, as well as the availability of funding, and the provision of debt can secure the deal.

On the other hand, if a substantial proportion of revenue comes from a less secure income stream (for example, F&B or short-term sublettings, rather than from rooms) the value of the property might be undervalued. The risk will increase also if the business relies on one company’s bookings for example.

The Flexibility of the operator to adapt to changes in the market and the brand-ability to position itself in a particular event such as COVID-19 post-lockdown could lead to more competition for the property.

Operational due diligence

A potential purchaser or valuer needs to review the property to see how it is operating. A hotel needs to meet the constantly changing environment of its potential customer base to be profitable.

It’s important that the due diligence reviews the operational suitability of the property for its given market. If a property is no longer suited to its historical market, reinventing the business model might be an alternative, without the need for extensive capital expenditure.

If the market requirement has changed, then the achievable trading profits may be impacted. lt is important to review each part of the business that makes up the overall property. A hotel needs to meet the specific requirements of the market it is trying to appeal to, allowing it to compete with current, and proposed future, supply if it is to stay relevant and successful.

From an owner’s perspective, the hotel usually needs the ability to deliver bottom-line returns, while from an operator’s perspective, it may also need to meet brand standards, to help build brand recognition for the operator and ultimately enhance the brand value.

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Lately, there has been a strong shift to diversify property holdings in many investors’ property portfolios. Income-generating properties, such as hotels, have started to become more appealing to investors.

The market has become more specialized than ever before, the increase in the range of operators who are prepared to offer leases and management contracts has led to more options for potential hotel investors. This increasing demand has led to a wide variety of hotel investment structures being created, from EBITDA-based leases, turnover leases, fixed RPI (retail price index) investment leases, and management contract investments.

Pros and cons of hotel investments

Positive attributes

Hotels have a number of advantages over other investment classes and, indeed, against more traditional property investment categories. These attributes attract specific investors who look for such characteristics in their Portfolios.

Pride of ownership

Hotels have a distinctive appeal among property classes in providing true pride of ownership for the investor. The ability of hotels to generate such trophy status is unmatched by other property classes. Potentially because of the ability of the owner to offer hospitality to potential clients and business partners (“Please, come and stay at my hotel.”), the amount of high-net-worth individuals (HNWIs) who own hotels are disproportionately large.

Potentially excellent returns

When the elements of location and great architecture come together and the property is well managed and reacts to market demands, then hotels can generate excellent returns, above typical real-estate returns, because of the operational risk involved.

Limited need for a comprehensive refurbishment

Hotels normally reserve a share of the revenue they generate into a maintenance fund to keep the property in a good state of repair. This is because if the property deteriorates, then trading is negatively impacted as customers are unwilling to pay as high a price to stay in a poorly decorated hotel. As such, this standard investment means that hotels are one of the only asset classes where regular redevelopment is not required.

Possibility to positively impact on returns through effective asset management

The very nature of the hotel business means that the operator needs to react fast to changes in the market dynamics to keep their market share. The ability of the owner to positively enhance their returns through their own action is a key reason for investing in hotels, for certain investors.

A good hedge against retail investments

Retail remains the primary property investment class, with investment funds allocating significant proportions of their property investment into this class. Hotels have been shown to be an effective hedge against the downturns in the retail investment market, making hotels a sensible way to mitigate risk for portfolio managers.

Complements mixed-use developments

New property developments tend to be mixed-use schemes because the risk for the developers is inherently diversified. Hotels form a very valuable part of most mixed-use schemes, as evening and night-time use bring a different dynamic to a larger development.

Security

The relatively consistent demand, along with the perception that “wealthy” people own real estate, ensures it has consistent popularity as an investment class among individual investors.

Tangibility

The physical’ nature of real estate with a ‘tangible presence’ provides comfort to a certain group of investors.

Negative attributes

A hotel tends to have the same disadvantages as standard real-estate investments. They generally comprise large lot sizes. Transaction costs remain high compared with other investment classes. The market for hotels is typically even more secretive than for standard real-estate investments, with ownership, prices, and yields paid, as well as trading data, guarded against public scrutiny. In addition, a hotel has one additional deterrent to standard investors: the element of business risk associated with the asset class.

This operational risk can be quite foreseeable, reliable agents can lead the buyer to a profitable investment.

Get inspired by the sunny season.

Summer is on its way! We opened our portfolio and chose our five favorite cities to have a summertime experience:

Albufeira

Comfort in the nature of Albufeira

It is impossible to think of summer in Europe without thinking of the Algarve, a paradise in the south of Portugal. And our suggestion is Albufeira because it is one of the most energetic cities in the area and is a short drive from other cities on the Algarve coast. In addition to the wonderful climate, Albufeira has many beautiful beaches (a reference in Portuguese tourism) and in summer the city is full of activities throughout the day and rich nightlife. The perfect destination for a family trip and gateway with friends. Don’t forget to try the amazing Portuguese gastronomy (in Albufeira we recommend the fish dishes!).

Main attraction: Get lost in the historic streets of the city that surround Old Town Square, these streets with the smell of the sea tells the history of Portugal and is full of Arab influences. The perfect plan for culture lovers.

Athens

A piece of history just outside the window

A city with so many gardens and rooftops that seems to have been designed for the summer. According to the locals, the perfect day starts with a dip in the sea, a cultural afternoon and an evening full of dancing (in addition to bars and restaurants for all tastes, in the city there are lots of festivals happening all summer). As soon as you get the chance, go up to the Acropolis and have a cool drink while looking around the place where modern civilization was born.

Main attraction: It is on the Athens Riviera, in the south of the city, that you find the beaches. They are a mandatory stop at this time of year. And if possible, take a day or two and take a boat trip to one of the famous Greek islands. The most beautiful jewels in the Mediterranean are “right outside the door” of Athens!

Sardinia

A fairy tale in Sardinia

Clean waters, sunshine, white sand … A tropical destination? No! We are talking about Sardinia! This paradise island in Italy is a mandatory stop in Europe for beach lovers.

The best thing about Sardinia is the fact that it is a very eclectic destination. The island is full of natural parks and playgrounds suitable for children. And its romantic landscapes and charming nooks makes it a perfect choice for a romantic escape.

Main attraction: If you are looking for the best nightlife to unwind after a day full of adventures, such as clubs and beach parties, we suggest: Costa Smeralda, San Teodoro, Santa Teresa di Gallura, Alghero and Villasimius. You can learn more about each one of them in this article. There’s no space for boredom on this island!

Barcelona

Historical building in Barcelona

Barcelona has a number of details that make the city a great destination for summer! First, it is one of the cities with the mildest climate in southern Spain; second, during the summer it is quiet and free of traffic because a lot of the locals are traveling; and last but definitely not the least, it is a city of reference in Europe when it comes to Culture. Don’t miss all the opportunities to try a local delicacy, visit the famous Picasso Museum, and in case you are a fan of sports, do a tour in the Barça Stadium.

Main attraction: We can’t talk about summer in Barcelona without talking about the Barceloneta beach! Imagine yourself there with your feet in the hot sand, a beautiful sunshine and a fresh ocean breeze in your hair. Sounds perfect, right? Fun fact: The beaches in Barcelona are not entirely natural, they were created with sand dredged from the sea bed, and the palm trees came all the way from Malaga.

Troia

A piece of Art in Troia

Just one hour outside Lisbon you can find a secret wonder of Portugal: Troia! A sandy peninsula that rises through the Atlantic, in the north of Comporta. The weather in Comporta is mild all year round, and is a sought after for the Golf and the Casino lovers. The options are endless; dive in the crystal clear waters of the reserve of the Sado estuary, do a hike and take the time to watch the many species of birds that inhabit the surrounding nature or take a boat trip –  if you pick the right day, you can even see the dolphins.

Main attraction: The country is full of relics left by the Romans when they inhabited the Portuguese territory. Visit Troia’s Roman ruins, classified as “Nacional Monument” in 1910. Historians point out that they were built in the first half of the first century. In that place they could find salting factories, houses, thermal baths, a mausoleum and its necropolis. A place full of stories to discover!

Are you inspired? 

Get in touch with us. We help you build your investment portfolio with Hotel assets that protect your legacy.