Following a record low for the hospitality industry in 2020 and a mixed 2021 amidst the yo-yoing regulations, demand is finally on the rise, driving an increase in the number of hotel assets coming to market. This is supported by a huge wall of capital keen to invest in the sector amid £4.14 billion worth of UK hotel investment in 2021 – an 84.3% increase on 2020 volumes, according to Savills’ recent report.
With 34% of last year’s UK hotel investments being made in Q4 alone, now could be the opportune time for investors. But, even for those with years of investment experience in other industries, understanding the hotel landscape can be a completely different ball game – particularly in a time of market recovery and a backdrop of high inflation. Andrew Robb, RBH Hospitality Management’s Chief Financial Officer, has shared his top tips for first-time hotel investors looking to take the leap.
If you are new to investing in hotels, there are plenty of companies with decades of experience under their belt who have meticulously scrutinised the peaks and troughs of property and hospitality trends over the years. An essential starting point is to seek advice from a hospitality management company as well as advisory or brokerage companies such as Deloitte, PWC, CBRE, JLL, Christie & Co, Colliers or Savills, all of which have dedicated teams of hotel specialists.
Choose the right location
There is no such thing as too much thorough research when it comes to choosing the right location for your hotel investment. Understanding demand generators is critical for the success of a hotel’s performance, however, more fundamentally, the location significantly drives the risk profile of the investment and determines how exposed the hotel is to future supply growth in a given market.
Understand the business
Undertaking an extensive audit of your customer base is essential. Who are your customers and what drives the hotel? Is it predominantly driven by transient leisure guests, conference business, local corporate accounts or private events? Be wary of formulating trends and assumptions based on hotel specific or market data from the past few years alone, as this shows a huge anomaly compared with historical data. What happened in the past may or may not happen again in a given market, in both a negative or positive way.
Be clear on your appetite for risk
All investments come with an element of risk, and in hotels, the service level and location often go a long way to determining it. Thorough scenario-planning must be a core part of the decision-making process to weigh up the possible outcomes and accompanying risk, both downside risks and opportunities.
Understand the corporate structure you require
Often, inexperienced hotel investors do not fully understand the corporate structures in place and expect a lease structure in the same way as retail and offices would work, but this is likely to yield a much lower return and is not readily available beyond Premier Inn and Travelodge. Higher returns can be generated by trading the hotel, engaging third party management expertise.
Choose your operating partner wisely
Whilst an obvious point for RBH to promote, it is vital that an investor understands what they are getting when they contract with an operating partner. The number of competitor management companies has increased significantly in the last few years, however, when you compare management companies, know that you are not comparing apples with apples and the strength and depth, track record or simply whether they provide their service via in-house resource (on their payroll) or by outsourcing to third parties (as a hotel cost) is crucial to understanding commercially what you are getting.
Although not suitable in all circumstances, the addition of an international brand from Accor, Hilton, IHG or Marriott can add huge value, de-risk the investment and also assist with securing debt. You walk into an existing customer base, expectations, and reputation of a respected brand. Even where an asset you are acquiring is currently unbranded, or where the initial business plan is to trade without a brand, you should always consider whether a brand would be an option for your hotel during the investment life cycle as this will help to underwrite the investment and provide downside protection.
Have your exit strategy planned upfront
It is important to know when or if you plan to sell the hotel as this will drive the business plan and investment decisions. If you are in for the long-term then branding or other capital spend may make more sense, versus a shorter-term outlook where the payback may be less obvious. In all circumstances consider and don’t underestimate the added value of being able to sell your hotel with vacant possession.