Hotel Room Investments – are you going to check in?
Over the Christmas period and New Period, we’ve had a couple of messages left on our answering machine with view to discussing the idea of promoting and offering hotel room investments to our clients. We only picked up the messages in the last few days and we decided to do some digging up and due diligence on the company which shall remain nameless.
Before we continue to tell you the conclusions, let us give an overview of what we mean by hotel room investments or leasehold hotel investments – it doesn’t require much description as the term is self-explanatory. In effect the developer sells on the individual rooms on a leasehold basis, say 125 or 250 years (usually in Greater London area) or even on a long lease of 999 years (usually in developments based towards Northern England), to clients who are looking to invest in something tangible, yet alternative to the regular property market. Sometimes, the developer may have a recognised brand in place such as the ‘Holiday Inn’ or ‘Mercure’ as an example. This obviously adds some meat and bones for clients to invest in hotel rooms and buy into the proposal (and so it should). The developer then sells off the management contract to such an operator over the period of 10-25 years, which is in effect giving you (the room investor) a reputable tenant for a long period of time. As for prices, we’ve seen them offered in between anywhere from £60,000 to £200,000 all in.
Can you get mortgages on hotel room investments?
Without a doubt, you will not be able to secure any lending against this investment using a high street lender or a regular buy-to-let mortgage. It just doesn’t exist. The only ways to finance the investments is using your own capital or in some cases, making use of developer finance which can range from anything in between 30% to 70% LTV (in very rare circumstances). This lending arrangement with the lender can and does vary greatly, so be sure to read the terms of the lending arrangement thoroughly to avoid any nasty surprises.
As with most of the investments we offer and the types of investments we get involved in, it is imperative to have a clear and defined exit strategy. With alternative investments, these are not always clear and in some instances, there isn’t even an option out should you need one. For example, from the very beginning of Aston Eaves, we have consistently rejected to chance to work with any developers that didn’t offer an option or get out clause from student pod investments. The same thing applies to hotel room investments and you should immediately see the warning signs if a company salesman gives you throwaway comments like “Oh, if you need to sell it, then list it with an estate agent” or “These are re-selling like hotcakes at auction”. It’s not true, it doesn’t work and it will cause you a headache down the line. Instead, if the developer can at the very least offer a buy-back clause and this is available to you for viewing before you part with any deposit, then at least you know that there is an exit strategy in place should you ever need it. It does not matter if you are looking to buy hotel rooms in York or finalising a hotel room investment in London – a well defined exit strategy is fundamental.
Key questions to ask about the hotel room investment
The first question you should be asking is, who is the developer and how long have they been doing this? Furthermore, the assignment with the operator – how legitimate is it and can you see the agreement. With such a novel investment, you need to be extra diligent and it is crucial that you look at the contractual agreement that has been drawn up by the developer and the operating company e.g. Holiday Inn. Will the operator agree to a minimum occupancy during the year? What rates does the operator intend on charging? Is the agreement tight or can they walk away after a year?
Rental guarantees on hotel room investments
Every scheme that we’ve been offered – in addition to the ones we’ve not – all have a guaranteed rental income period for a set amount of years. We’ve seen it range from 2 years to 20 years which is an incredible commitment. With any guarantees over say two or three years, we believe that they should be backed up by a proper document and almost probably, insurance backed. Even for two to three years, there should be some kind of documentation that fully protects the rental guarantee. It’s all well and good if the salesperson tells you that the company has been in existence for ‘x’ years, but as we’ve seen in the recession, even the biggest names can go pop. In short, make sure that the developer/agent can provide a comprehensive account of the rental guarantee and if it’s insurance backed, then you should request to see the insurance terms.
Where is the hotel located?
In the last 24 months, we’ve seen schemes come up with a qualified third party operator that has international recognition in Wembley, London; Docklands, London; Canary Wharf, London and York, Yorkshire. The hotel room investment opportunities in these locations were far better located than the ones that we saw that did not have a reputable operator. We can’t be sure of the reasons why exactly, but the yields in the better located areas were somewhat lower than the yields in the less well known areas.
What is the demand in the area right now and what projections for the future?
If the hotel is already built out and has been income producing over a number of years then there should not be a problem to see the company accounts as this should be made available to the public if necessary. Once you’ve had access to this information, you can determine whether the headline figures stack up and the proposed rental guarantee figures are valid. If the developer or agent starts making excuses that ‘there are complications’ or ‘it won’t be easy to get hold of the accounts’, then you should look to walk away. If the developer or agent are looking to make the sale, then they should be able to provide you with what is diligently available to make an informed decision.
For off-plan or not yet ready hotel room investments, then you’ll have to do some research on the projected numbers. Google the streets to see if there are other hotels nearby. Use websites like AlphaRooms or Hotels4u.com to research current room rates to see if the numbers stack up.
For further reading on hotel room investments, we found this blog piece to be particularly informative.