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
|
Pros |
Cons |
|
Pride of ownership |
Relatively large lot sizes |
|
Potentially excellent returns |
Difficulty to access off-market properties |
|
Limited need for a comprehensive refurbishment |
Expensive and time-consuming to market |
|
Returns can be enhanced by investor’s management |
Relatively illiquid |
|
Great hedge against retail investments |
High transaction costs |
|
Complements mixed-use developments |
|
|
Relative security from property investments |
|
|
Tangible investment |
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.