The risks and rewards of investment in hotel room

Since the middle of last century the large hotels of postwar Europe began to practice the sale of individual rooms to investors. Since then the practice has spread around the world and captured the most popular business and tourist destinations: the UK, France, Switzerland, USA, Australia, Dubai. Usually, this kind of investment popular with small investors.

Diagram of hotel investments is simple: the investor acquires the property room or several rooms in a hotel complex. Then he can either engage in self-management of their property, which happens very rarely, or to negotiate with a hotel operator or a professional management company.

Investor and operator of the hotel share the profits between themselves in one of two ways. The investor can obtain a fixed return, which he specifies in advance with the operator. In this case the profit is independent of the actual occupancy of rooms. The second option — getting the investor arrived at a floating rate, when the yield number could be higher, but the investor will share with the operator, for example, the risk of unclaimed apartments to tourists.

Depending on the terms of the contract, the investor can use their numbers and not for its intended purpose, that is, to live in them. Some operators provide the opportunity immediately after the acquisition offer, others after a certain period of time.

The benefits of investment in hotel rooms

The main advantage of investment in hotel rooms is a low threshold of entry. The minimum cost of the hotel rooms in Europe is about 100 thousand euros. As a rule, the objects of such investments are the most profitable “work horses” of the hospitality business — a three – or four-star hotels in Europe.

As already noted, the investor is not burdened with the need to constantly manage their property. This format will be useful for those investors who have a primary business in another field and are considering an investment in a hotel room as a means of replenishing the portfolio of profitable assets. Management organization solves all the General and private problems of the hotel, so do not worry that the investor will personally have to decide on a broken soul or a cool reception guests.

In addition, investment in the hotel rooms attract with the opportunity to receive a stable monetary income, especially for investors from Russia in the current situation. The average yield hotel apartments is approximately 4 % at a fixed rate and 6-10% at floating rates. At the same time to the object’s selection must be approached very carefully: it is necessary to examine the location of the complex and its prospects, as well as to learn from the experiences of the management company.

Thus, investments in the hotel room — a profitable and exciting opportunity. But, as in other areas, here too, has its pitfalls, which should be remembered by the investor.

Pitfalls of investment in the rooms

The transaction may differ significantly depending on the legislation of the country, so it’s best not to neglect the services of a local lawyer. At the same time, for example, in Austria the transaction is made as purchase and sale of separate property and not much different from buying an apartment.

As already noted, the investor is not worried about the marketing side of things, which fully remains the responsibility of the administering organisation, but this medal has a reverse side: the investor is unable to determine the marketing policy of the hotel. For example, if the operator decided to convert the hotel from a family in the hotel business class and this decision eventually proves ineffective, the investor will not be able to affect him.

It is better to choose the investment a room at the hotel, under the management of a large hotel chain with extensive experience of management of hotel real estate. First, it will protect investments from the non-solutions that can be used with little hotelier. Second, a large network exists for decades, so once having signed with them the contract on management of hotel room, you can count on long-term cooperation.

However, signing a management agreement even with a large company, you need to firmly decide who bears the cost of maintenance and repair of the property. If these costs are borne by the investor, it can significantly reduce the yield of the investment.

The investor must study the object of investment and the conditions in which he works. Although this sort of deals usually stipulate a minimum monthly level of return, no hotel is not immune from market forces. After the shock of 11 September 2001, the American investment company switched its focus from most “hot” objects in the center of the world’s capitals (NY, London, Paris) to a less fashionable hotel in the province (Halifax, Glasgow, Gloucester). It is important to take into account the seasonal factor — hotels, oriented on recreation and leisure, idling in the “off season”, while hotels that welcome business travelers, have a stable income throughout the year (this explains the profitability of investment in the countries of Western Europe).

If the investor wishes to sell the hotel apartments, it may be faced with the challenge of finding a new buyer. The most obvious candidate for acquisition of this object will be the hotel operator, but he will buy only at a reduced cost or without regard to capitalization growth. In addition, the hotel room as an asset encumbered with a lot of conditions of ownership under the contract, which was suited to a single investor, but may not suit another.

Finally, the earliest investor in a room in peak season is not beneficial to either the hotel or to the investor, because it reduces the yield of the investment, so as a rule, the management company requires to rent her apartment for rent for the entire period of the agreement or imposes a limit on the time of residence of the investor in a private room.

Pros	Cons
low “entry threshold”	The risks of downtime if the floating rate
the office carries out the hotel operator	a foreign jurisdiction transaction
stable profitability	the limited impact marketing of the hotel

Market prospects

As noted by the participants of the Serviced Apartments Summit, held in London in 2014, the investment market in the hotel rooms is growing rapidly, especially in the last three years.

London was not casually chosen as the center of the summit: according to Savills, in London only 1.6 rooms have 1,000 business travellers, while in new York and Hong Kong 5.7 and 5.3, respectively. Thus, London is also the market with the fierce competition for investors, but at the same time possesses a high investment potential.

Do not forget that the profitability of investments in the hotel room depends on the flow of guests. From this point of view, a serious competition for hotel business is a fast-growing segment of private rental housing, as well as Internet services, which significantly simplified the rental of real estate abroad by private individuals without intermediaries.

The opportunity to invest in your rooms offer hotel chains like the Mandarin Oriental, Holiday Inn, Condo.

Summarizing the above, we can formulate some General advice for investors:

• you need to carefully examine the hotel market of the country where there are objects for investment;
• to explore the possibility of creating leverage for investment — it will significantly increase the yield;
• multi-page contract in a foreign language do better to read;
• focusing on three – or four-star, not five-star luxury giants;
• not to neglect the suggestions of the provincial hotels — they may be less profitable than the Metropolitan;
• to give priority to targets in Austria, great Britain and hotels in France — they are renowned for their reliability investments.

Ivan Chepizhko, Tranio