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Hotel Room Investments: are they worth it?

Although it can be lucrative to invest into individual hotel rooms, there are also some downsides. While they can deliver steady returns and have a low entry threshold, they also hide complex legal structures and unreliable liquidity. Not to mention, they need to be managed by a hotel operator. Tranio.com explains the details.

By the middle of the 20th century, post-war Europe’s large hotels had started selling individual rooms to investors who often came from abroad. Since then, the trend has spread around the globe, capturing the most popular tourist and business destinations: the UK, France, Switzerland, Australia, Dubai and the USA. Small-scale investors seeking to diversify risk in their investment portfolio are often drawn to this option.

At first, the investment structure looks simple: the investor establishes a legal entity (firm) and opens a special purpose fund in the name of the company. All financial transactions relative to the hotel units are then channelled through this account, from purchase to returns on investment. The managers of these global high-profile hotel chains then do their best to make the rooms yield returns. The contract establishes a fixed term for the investor to let out the rooms as well as monthly rental income.

The investor and the hotel operator can share their profits in two ways: either the contract specifies revenue that is independent of the profits derived by the management company or the investor earns proceeds at a variable rate determined by the hotel’s success.

Investing in units (i.e. several rooms) should be differentiated from buying the entire hotel, which would require the services of a management company or force the investor to register and start his own management company.

Advantages of investing into hotel rooms

Hotel rooms do not require much capital and investors tend to choose the money-making “workhorses” of the industry. In Europe, those are the 3 or 4-star hotels. A room in a 4-star hotel in Bavaria (Germany) sells for about €58,000.

Investors entering into a contract with a fixed rate of return do not assume any risks pertaining to the management of the hotel: if the shower breaks or the customer isn’t happy with the service, it’s not the investor’s problem. That’s why it’s always a good choice to buy a room in a popular hotel managed by an international brand with a well-established reputation.

Hotel rooms earn steady returns. While the revenue may vary depending on the property and location, the investor can expect about 4% at a fixed rate and 6–10 % at a variable rate.

Finally, the hotel room can also be reserved for personal use: many investors and management companies agree on a timeframe during which the investor can enjoy his purchase, usually several weeks a year.

Hotel rooms are a profitable and alternative option for investors looking to diversify their portfolio but who don’t want to put down a lot of capital. However, there are some pitfalls.

Risks when investing into hotel rooms

For foreign investors, hotel room units fall under the jurisdiction of non-domestic transactions, leading to complex contracts and laws when it comes to collecting returns. Contracts are delivered in a foreign language and can reach 100 pages. However, they are often quite standard and unlikely to be amended drastically.

While the investor is free from the woes of managing his hotel room, he is also subjected to the marketing policy of the company: if the hotel changes strategy or fails to maintain high standards, it may lose in popularity.

Before buying a room or unit, it’s very important to know the market and its prerequisites for success, because even if there is a fixed minimum monthly return, the hotel business is not immune to market contingencies. For example, following 9/11, US investment companies turned to more modest hotels in the province (Halifax, Glasgow, Gloucester), shunning the globe’s hottest properties (New York City, London, Paris).

Seasonality should also to be taken into consideration. There is nothing much happening in holiday hotels during off-season, while business accommodation shows steady returns throughout the year. This is why there are great hotel room investment opportunities in Northern Europe for example.

However it’s hard to find rooms and units for sale (5-10 listings on the market at one time), and even though large investment companies and pension funds are actively seeking them out, it doesn’t guarantee an easy sell either. In fact, just one separate room is encumbered with multiple ownership conditions. These may have worked for one investor but not suit another.

Foreign firms who sell hotel rooms target buyers from abroad. For them, the most profitable option is an investment leveraged or supported by a self-funded pension (e.g. Self Invested Personal Pension) which is found in the UK and Australia. Therefore, unless you are a British pensioner, your investment prospects might not be so bright.

Leveraged investments yield higher returns but the risks are also higher. Not to mention that a private investor, especially a non-citizen, will often have difficulty raising funds at a low rate over the long term.

To crown it all, an investor dreaming of nights in their hotel room might be sorely disappointed to learn that it will benefit neither his account nor the hotel management, particularly during the high season.

Challenges facing investors depend on the location of the hotel property. In Germany, for instance, procedures ruling property rights are complex, while in Australia or the UK, investors will have to battle with strict requirements just to obtain a loan.

Pros Cons
low entry threshold risk on return
for variable rate investments
hotel managed
by an operator
non-domestic
transaction jurisdiction
steady returns limited control
over hotel operations
own room for recreation
or business purposes
low asset liquidity

Market developments

According to the 2014 Serviced Apartments Summit in London, the market for hotel rooms has been showing noticeable growth over the past three years – and there is a reason they chose Britain’s capital to host it. Savills reports that London has the lowest number of hotel rooms per 1,000 business visitors. While competing global hubs like New York City and Hong Kong weigh in at 5.7 and 5.3 respectively, London is ranked at a low 1.6 making competition on the market tough and investment potential high.

Interested buyers should also note that returns on hotel rooms depend on the visitor flow. The industry is strongly challenged by fluctuating prices on rental housing and the growing segment of online services which simplify peer-to-peer accommodation rental.

Recommended chains that sell rooms are Mandarin Oriental, Holiday Inn and Condo.

Recommendations to potential investors:

  • Know your market: study the industry where you want to invest.
  • Know what’s out there: explore the opportunities to leverage your investments for better returns.
  • Know your contract — get a full translation of the contract and read it.
  • Know your target segment — 3 and 4-star hotels are more popular than luxury 5-star suites.
  • Think differently — guesthouses outside the centre can be just as profitable as hotels in the capital.
  • Prioritise: property in the UK and France have an excellent reputation for reliable investment.

Ivan Chepizhko, Tranio.com

Tranio’s managers offer advice on buying real estate overseas
Anna Boyarchukova
Anna Boyarchukova
Real Estate Expert Tranio overseas
+44 17 4822 0039
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