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Tips for investing in hospitality
May 2021 1327

 

HOSPITALITY REAL ESTATE IS UNIQUE

Do not compare hospitality investments to residential real estate and other asset classes. This is an asset class that can be considered more volatile but could generate higher returns in markets lacking relevant supply, and in markets where residential real estate, for instance, is saturated. Hospitality real estate generates a regular cash flow with an exit option that can be very lucrative when sold during strong transaction market conditions.

 

DIVERSIFY YOUR PORTFOLIO

Luxury is not always the right investment approach. In many markets it may be a point of entry, but not for an entire destination. It is by introducing other hospitality classes in the budget, midscale, upscale, upper upscale and the serviced apartments categories, city hotels versus resorts, that renders a more balanced investment strategy. Sources of demand, segmentation and seasonality vary across hospitality types and locations; thus, diversification can secure a higher overall return on investment.  

 

FOCUS ON LESS VOLATILE HOSPITALITY ASSET CLASSES

We have found that in some downturns budget and midscale hotels benefit from stable or increased values caused by displaced demand, affordable rates, a lean cost structure and for generally being relatively more recession proof. We have seen serviced apartments maintain higher levels of occupancy, consistent medium to long stay demand, less operational risk and a cost structure that is even more attractive than that of budget hotels. We recently noted, now more than ever, the attractiveness of resorts and the importance of outdoor spaces, spacious surroundings, leisure offerings and the strength of leisure demand. Also, do not underestimate the growing demand for lifestyle hotels and trendy facilities as hospitality real estate becomes more and more creative. Co-working spaces are redefining hotel design as much as they’re redefining the office real estate model.

 

DO NOT CUT CORNERS

A qualified project team is key to delivering a hotel asset within budget, on standard and on time. Without the right team of consultants, owners will likely be forced to fix mistakes and make changes along the way causing delays and leading to additional costs. Appointing an inexperienced team and by cutting corners on talent and skill may save owners a hundred thousand dollars today but will most likely cost millions of dollars in adjustments, redesign, and major delays which lead to immeasurable loss of revenues. 

 

CONSIDER BRANDED RESIDENCES BUT BE
CAUTIOUS

Other financing strategies such as selling branded residences to third party investors could help finance the rest of a hospitality development. This is attractive in locations where investors seek a second home or a leisure residence affiliated with an international brand to benefit from status, facilities and amenities affiliated with the hotel brand. The premiums achieved on such branded real estate average around 35% across the board when compared to independent residential offerings, with premiums being much higher in markets with limited supply. But a thorough real estate assessment is key to understanding the opportunity in the market and if there is a demand for such a product. It is advised to seek specialised legal advice for the right legal structure in line with established local laws, and always have a fallback position in case sales do not pick up as expected.

 

DO NOT NEGLECT F&B AND MEETING SPACES

Food and beverage as well as meetings and events are major pillars in most hospitality assets since they diversify the demand mix. F&B offerings are becoming more relevant and highly competitive. It is best, in some cases, to consider outsourcing such facilities and hand them over to the experts to run. Having said that, too much F&B can increase your investment risk, and guaranteed F&B lease income promised by a third party operator may look good on paper, but a default on the lease is the last thing any hotel owner needs. Large hotels with insufficient meetings and events facilities are more likely to lose related revenues which would ultimately lead to an indirect downwards impact on average rates. Do not shy away from creating lifestyle F&B destinations since hotels should focus not only on in-house guests but also on the local community to remain competitive.

 

THINK LONG TERM

Do not let recessions and pandemics deter you from an investment. Hospitality real estate is meant to live through cycles, pass from generation to generation or change hands through transactions. It is the optimal investment that will offer the resilience to overcome downturns and the flexibility to ride a market recovery.

 

LOOK OUT FOR CHEAP DEBT, SUBSIDIES, AND INCENTIVES

Debt is affordable in many markets. Do not shy away from attractive interest rates which could increase the value of your investment and reduce your financial equity exposure. In markets where subsidies, loans and incentives are offered by funds and governments to encourage investment in tourism projects, investors will find ways to benefit from various tax breaks, reduced interest rates and attractive subsidies that may no longer be available in the near future once the market recovers.

 

INVEST RESPONSIBLY

Sustainable investment today is key to international hotel groups as well as many markets and business-friendly governments as we see projects, policies and laws developed with consideration to the environment. An asset that is developed responsibly will also end up reducing operating costs as consumption of energy, water and resources are reduced, while some governments incentivise green initiatives by offering investors tax breaks of various kinds. But responsible business does not stop at saving the planet. It includes helping the communities we operate in and by supporting various charities.  

 

PARTNER WITH THE RIGHT OPERATOR

It is not about the largest hotel group or the lowest fees or the best promises that should be the driving force for any owner branding decision. It is about the right brand fit for that particular market in a certain location – and with the right partner that will optimise the value of your real estate, creating a healthy relationship which is far more valuable than just focusing on simply the fee structure of a long-term agreement. Franchise agreements could only be considered if owners have the operational expertise or through a third party (white label) operator if it makes financial sense.

The pandemic reiterated even further the appeal, comfort, operational standards, and hygiene protocols that guests look for in a brand. The pandemic simultaneously reminded many owners of the benefits that come with an international brand name, benefits that independent hotels generally lack: from development guidelines to sustainable design, from operational expertise to global distribution competitiveness. 

 

* Find Radisson Hotel Group on stand VB4  





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