Pros and cons of different hotel types for property investors
If you’re searching for investment opportunities to meet your objectives of guaranteed income and a known capital return, then you will probably have come across hotels as property investment opportunities. You may have read about our hotel room investment launch – with an 8% rental guarantee for five years and guaranteed capital growth of 15%.
A number of factors could largely determine your returns from a hotel as a property investment, including:
- Buying in the best places to invest in property UK
- The choice of hotel investment partner
In this article, I want to look at the different types of hotel investment partners and how this might affect returns from investment.
Hotel partner options
As an investor in hotels, you will be investing for returns from the hotel as both a business and as a property investment.
When looking at the business, there are two major types of operational models: the chains and independents. Within these models there are some operating options, all of which have different advantages and disadvantages:
· Privately owned hotels
The owner will probably be a single company or person, but behind them might sit several investors. The owner gets to make their decisions, and that can be a good thing – no big corporate body to answer to. The rooms can be decorated and equipped however the owner wants, although any business decisions might need to be agreed with the investors. The company has to pay for all the advertising, publicity and marketing. There won’t be any of the cost benefits of bulk buying that the national and multinational chains receive, and if the owner doesn’t have experience or expertise in hotel management, revenues and profits could severely undershoot expectations.
· Franchised hotels
The large hotel chains – like Marriott, AccorHotels, IHG, and Best Western – are mostly franchised. The owner pays a fee to the chain. In return, the hotel is branded as a Marriott, or Best Western, etc. Logos and names are consistent, as is the whole gust experience: rooms, fixtures and fittings, bedding, and so on are all standard. The hotel benefits from the chain’s volume discounts, but is locked into those supplies – there’s no flexibility to take advantage of other supply opportunities. There may also be limited options to present a localised package of guest amenities.
Many of the management decisions will be inherited on a top-down basis: with processes, protocols and procedures all dictated by the chain. While the benefits of being seen as part of the large chain might appeal, it also has to be remembered that any problems with the chain resonate in all its franchised hotels. If the hotel chain undertakes a rebranding exercise, the hotel owner may have to foot a large part of that bill for its part in the rebranding.
· Leased hotels
You may decide to invest in a hotel, perhaps by being the sole owner or part of a consortium of investors. Where you make this type of hotel property investment to lease out, you may be able to guarantee your income. For example, by leasing out for a fixed amount of rent, you will fix your income.
On the other hand, the investors may decide to do a deal whereby they receive some of the revenue or profit. While you might do better with this type of investment model, you might also find that a poorly run hotel produces poor revenues – and that will affect your property investment returns.
Finally, and the lease agreement with the highest risk, investors could accept a percentage of revenue after costs. If costs are as much as or more than revenues, as an investor you’d get nothing.
Privately owned, independently managed hotels
This type of investment is a little like purchasing a buy-to-let investment property and employing the services of a property management company to do all the day-to-day work. Often a hotel owner will bring in other investors, and employ the services of an independent hotel management company to run the hotel for them.
The management company receives a payment for running the hotel, and the owner has to cover costs. However, the management company may also be further incentivised by the payments for increased revenues and profits. It ensures that the management company works hard for the hotel and its investors, keeping costs down, investing in people and the hotel product for the future, and maximising marketing opportunities.
When the hotel is an existing hotel, the owner will have a good idea of current revenues and will be better able to set fixed returns that are based on these revenues. The capital growth potential can be projected using business metrics as well as property investment analysis. The property owner gets the benefit of investors’ money to help the hotel management company in its efforts to grow the business (and increase value).
Individual investments benefit from professional hotel management, guaranteed income, and a property investment that increases in value over the period of investment. At the expiry of the investment period, the owner repurchases the investors’ hotel rooms at the pre-agreed price, giving the owner the hotel they wanted and planned to create.
The Mitchells & Butlers advantage
In this investment blog, we’ve outlined the main types of hotel operation and investment. The hotel and leisure industry is one of the fastest-growing economic sectors in the UK and holds some fantastic property investment opportunities for investors. Investment in a hotel can certainly help you achieve your financial goals.
When we analysed the opportunity, we came to the conclusion that owning hotels and employing a top-notch management company should provide the guaranteed income and growth that so many investors desire.
The management company that we’ve partnered with is Mitchells & Butlers. They’re one of the biggest companies (if not the biggest) in the UK’s hospitality industry. They are Britain’s leading pub, bar, and restaurant company, and operate more than 1,700 locations around the country, with hotels in more than 50 locations. This experience is a huge advantage for investors.
Call us today on +44 207 923 6100 to discuss your investment objectives and how hotel room investment might help you achieve them.