How to Make Hotel Investments
Emerging markets such as India and China are augmenting an otherwise lack lustre global travel industry. The reality is that the upswing in recent years in the hotel industry is due mainly to travellers from these too massive regions. It should therefore not come as a surprise that hotel investment experts are excited about the trend and the potential growth it can bring with hotel owners, hotel operators and industry investors all being prompt to pounce on new acquisitions.
At the same time though, investment in the hotel industry is still plagued with all of the normal complications and commercial risk. There is always very large amount of capital at stake, and this requires meticulous planning and considerable expertise by and of the investor. Investors should upon expert opinion, and often do, before finalising a decision for an intended investment. Several points that should be considered, and indeed re-considered, prior to outlaying any investment funds in a hotel are outlined below.
Always Inspect, or Have the Property Inspected
The property may be useless for the purpose you intended upon completion of the deal; this can occur, and does occur often, despite the hotel displaying all of its best attributes during the negotiation and paper due diligence process. The most common reasons are often:
- underground environment pollution
- interior mould infestation, and
- structural damage from termites and rodents.
You should only ever finalise a deal once you have completed a thorough physical investigation of the property yourself or by your trusted advisors and professional service providers. Remember though in the case of the latter they too can ‘get it wrong’ and their contracts with you will indemnify them if they do, so you are still left holding the bag. That said you should certainly engage an engineer to check for the conditions mentioned above and authenticate that the property does not present any of these problems. Such authentication will usually be something you can rely on at law and is necessary for you to be sure that the investment property complies with all building codes.
Familiarise Yourself with Your Hotel Management Company
If you are contemplating engaging a specialised hotel management firm to oversee the operations of your hotel business, reassure yourself of that company’s capabilities via several sources. Look into and consider its operational performance, and also run some cross-checks with other properties that it has under management. Look closely at and analyse its track record with regard to maximising revenues and managing expenses responsibly.
Analyse Where Your Visitors Come From
The hotel should have a good mix of visitors across various market segments including commercial, group travel, business travellers, and leisure or vacation travellers. If the hotel depends on a single segment, unless you have a very specific and focused niche you should reconsider your investment as such properties rarely do well throughout the entire year. Properties that attract visitors from across several or all segments of travellers are able to bridge slow periods in one segment with increased traffic in another.
DO NOT Depend Upon a Single Business for Your Hotel
Amazing as it seems this happens a lot. Hotels cater to a single client and when that client takes a dive, so too does the hotel. If your hotel exists to service visitors from one company, you are relying on that company’s ability to perform and grow. Frankly you would be better putting your money into the S&P500 or similar. Properties that depend upon obtaining visitors from an airport, another company, a business park, or an amusement park, can go crazy when these businesses cease to generate the income they once did, or worse they shut the doors completely.
For example, with airports, when less people travel by air and the airlines are hurting; your business will suffer the knock on. In regional areas an airport might be relocated or a new larger regional airport may be created elsewhere. Either way if your hotel is relying on traffic from the airport you will feel the pinch very quickly. Similarly if the business on which you are relying for your visitors decides to change its headquarters, or the business park starts to lose clients, or the amusement park is hit with heavy competition from a better, your business will fall. It is important that you look at your revenue sources so that if one segment hits on hard times, it does not impact you to the point of distinction and you can progress through the tough times keeping the hotel fires burning.
When is the Hotel In-Season?
Your new hotel should have an in-season of at least eight months of every year. If it doesn’t then, unless there are extreme extenuating circumstances, it simply is not an option worth your consideration. If the in-season is shorter than eight months your hotel will need to have premium rate occupancy during the in-season to cope up with annual operational costs. The in-season months should also be consecutive lest you will most likely experience lower than potential revenue.
Some Obstacles You May Face
Some markets already have extensive land allocations that are zoned for hotel development and acquiring land in these markets can be relatively simple. Subsequently, when requirements for obtaining finance are made easier through pre-zoning and pre-development approval, these markets will experience overcrowding with a large amount of competition going up around your hotel. If a market has barriers that make entry for the hospitality trade difficult, the possibility of over-population and/or overcrowding of other hotels is less likely.
In general, it will more often be preferable to invest in a market where the barriers of entry are higher than average. A word of caution though, do approach this carefully. You do not want to be the trail-blazer who did all of the hard yards at exorbitant expense to enable a market to be opened for your competitors to flock to and reap the reward of your hard labour.
KISS – Keep It Simple Stupid … ‘it’ in this case are the Terms
Every investment should have an exit strategy. Hotels are no different. Always consider the eventuality that you will sell the hotel at some point in the future. Your hotel acquisition should be planned with this or some other exit strategy in mind. The Management Contract and Franchise Agreement should be designed with clauses that permit termination without having to jump through hoops. There are a number of ways you can maintain a more dynamic and flexible capability with your hotel investment. For example, assign or prepay the mortgage, buy out existing partners and use a good industry experienced chartered accountant to assist you to minimise your tax exposure.
Take Care to Choose the Brand for Your Hotel Wisely
Like with any business, how you brand your hotel will have major implications on the type of visitors you attract. In the hotel industry most people don’t invent new brands but reach an agreement with an existing brand subject to a variety of pre-conditions, quality and other control parameters. The established brands are generally safer than newer brands seeking to establish an identity and a footprint in the market. However newer brands may be more dynamic, and easier to deal with than the more established brands. Irrespective of whether you choose an established brand or one of the new kids on the block, look to the visitor demographic attracts.
- Are the visitors to your hotel more likely to be travelling for business or leisure?
- Is the brand better known as a business hotel or vacation lodging?
- How does the brand fit in the area where you are considering your hotel investment?
These are just a few of the questions you should consider.
The above is simply a guide to assist and is by no means a complete plan on how to ensure your hotel investment is a successful one. I do suggest that if you consider the above and take action on at least these areas before any funds change hands, you will certainly be better positioned to expect a better outcome and realise dividends from your investment.
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