For an asset with all the bell boys and whistles, don't just book a hotel room – buy it
As investors cash in on the tourism market, draw an income from guests and look to sell at a big profit, Kate Hughes asks if you should check in too
Sunday 16 March 2008
So what's the room service like for investors? The UK is a tourism hot- spot with a thriving hotel industry, and London has the highest average room rates in Europe. And in the past few years, property investors have been offered the chance to get in on the action by buying a hotel room, often in a plush new development.
But is this really the penthouse suite of investment, especially for those with no knowledge of the hotel industry? And what is the chance of making a genuine, sustained profit in such volatile times for the domestic and global economy?
The theory is that those with a minimum of £50,000 can buy a room that is then managed entirely by the hotel itself. Investors don't need to worry about people stealing the bathrobes or rock stars throwing TVs through windows; the cost of repair or replacement will be borne by the hotel.
Owners typically earn 50 per cent of the income from occupancy, and get around 52 nights every year to stay in one of the company's chain of hotels. The room can even be added to a self-invested personal pension (Sipp), so income and any capital growth are tax free. The general rule is that the better the location of the hotel, and the more stars it attracts, the higher the starting point for investment.
GuestInvest, a hotel room investment firm, focuses on the very well-to-do investor, with rooms in its most upmarket hotel starting at £1m for Blakes in west London. Its latest project, The Jones near Hyde Park in central London, offers rooms from £317,000 and the investment comes with a 6 per cent guaranteed return for the first year.
If you can't quite stretch to that, others, such as the Owner Hotel chain (www. ownerhotel.com), offer rooms in budget hotels from around £50,000.
"This is a purchase that bucks the trend in investment," says Johnny Sandelson, chief executive of Guest- Invest. "Returns are based on occupancy rates, which continue to rise – as against stagnant house prices and a faltering stock market."
Any capital growth depends on the success of the hotel and the value of the land on which it's built. As for the level of annual income earnt, this relies on the hotel's occupancy rate, which in turn can often depend on tourism.
So with property prices – even in London – falling and the US possibly heading towards recession, with the potential fallout this has for the British tourism industry, are hospitality investors set to lose out?
The hotel investment firms say the good times continue to roll and that some eye-catching returns are still possible. According to GuestInvest, people who bought rooms in 2004 at its Guesthouse West, in Notting Hill, west London, are enjoying annual income of around 8 per cent. Those who have since sold their rooms, GuestInvest reports, have netted average capital growth of 15 per cent.
Meanwhile, Owner Hotel says that, based on 90 per cent occupancy of its £49.99-a-night rooms, the annual income for owners is around £7,547 before the annual service charge is deducted. That equates to 15 per cent of the £50,000 original investment. If the room is occupied for only half the time, the annual income drops to around £4,923, or 8.2 per cent. Nevertheless, that's a better return than can be gleaned from a savings deposit account or, in most years, shares.
But Peter McGahan, managing director of independent financial adviser Worldwide Financial Planning, is sceptical about hotel room schemes. "The exceptional returns are based on almost total occupancy," he points out. "And you have to ask yourself whether hotel rooms are only ever empty for a few nights of the year."
Hotels may be in for a rough ride, he adds, with the downturn in the global economy meaning that fewer people have spare money for holidays. Americans have been hit hard by their own credit crunch and the low value of the dollar against the pound. Considering that US tourists made up almost 12 per cent of the total number of overseas visitors to the UK in 2006, this alone could have serious repercussions for room occupancy.
If you are still keen to buy into one of these deals, but don't happen to have several hundred thousand pounds burning a hole in your pocket, there are only a few lenders that will be willing to give you a mortgage. GuestInvest works with four mortgage pro- viders, including Bank of Scotland. Its product offers a loan of up to 70 per cent of the room price, in a tracker deal set at Bank of England base rate (5.25 per cent currently) plus 1.5 per cent. That is one of the highest rates of interest around.
GuestInvest's rooms can be sold on the open market, or through the firm itself, says spokeswoman Sally Wiber. But Miles Shipside of property website Rightmove points out that the likely size of any profit between buying and selling is hard to assess. "This is a very new industry with no track record of capital appreciation to look at."
In the current property market, he adds, "how reliable is the valuation of the appreciation of a hotel, let alone one room in a hotel?"
GuestInvest claims that its rooms are typically on the market for just eight weeks before being sold. But experts question how easy it really is to sell rooms if there are so few lenders offering funding.
Mr McGahan urges investors to be cautious and asks: "Why – if they are confident of such huge returns in the long term – are these companies offering these deals to investors rather than keeping them for themselves?"
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