A look at the real estate hotel investment?
By Christian Salloum Published On November 3, 2022
If well considered, investing in hotel real estate can be profitable. Over the last decade, investments in rooms and hotels have been changing. Individual investors are buying rooms whilst hotel operators are venturing into purchasing potential hotel buildings.
This definitive BrandPortunity Hospitality Consultancy guide provides up-to-date information for those interested in hotel real estate.
What is hotel real estate?
Hotels are different from any other property type. They are operationally complex and depend on nightly rentals compared to short or long-term leased apartments or offices. Hotels are highly responsive to changes in the market, such as low and high seasons. This flexibility has meant that the industry faced massive disruptions during the pandemic.
Types of Hotel Investments
Hotels are categorised according to their service offerings and available amenities.
Full-Service Hotel
Full-service hotels offer accommodation, retail, spas, event spaces, restaurants, bars, room service, and sporting facilities. They rely on large volumes of staff, and the hotels include world- famed chains such as Hilton, Marriott, IHG and Accord.
Select Service Hotels
This category includes hotels such as Aloft, Hilton Garden Inn and Hotel Indigo. It’s a mix of full and limited-service hotel offerings
Limited Service Hotels
These hotels are similar to Comfort Inn and Hampton Inn, hotels that don’t offer any restaurant or banquet facilities. Some hotels offer amenities such as a swimming pool or fitness centre.
Extended Stay Hotels
Embassy Suites, Staybridge, and Hiltons’ Homewood Suites are great examples of extended stay hotels. They provide temporary large suite-style rooms with at-home features such as a kitchenette and laundry. They cater for families undergoing relocation and business travellers on longer assignments.
Budget Hotels
Hotels such as Days Inn and Ibis Hotels keep the costs to a minimum by providing limited amenities, services and assistance.
Key Data to Consider
- Average Daily Rate (ADR) – divide room rate by rooms sold over a select period
- Revenue Per Available Room (RevPAR) – total room revenue divided by the number of available rooms
It is essential for hotel owners and operators to understand the insights in daily, weekly, monthly and annual RevPAR trends. Comparing competitors’ RevPAR hotels to accurate performance analysis is beneficial.
Key Elements for Hotel Success
There are two groups – tourism and business. Business travel tends to be during the week, whilst tourists drive demand at weekends and peak holiday seasons. To run a hotel business, operators or hotel owners should know the key indicators that drive success.
It’s essential to drive an optimal business mix in any specific market. Seasonal demand is commonplace for ski and beach resorts. Food and beverage-themed events and entertainment can also boost sales and income.
Getting Started
Investors should;
- Conduct an ADR and RevPAR metric across a group of similar hotels in the same market
- Assess operating efficiency and profit margin
- Consider price and profit. A budget hotel may be far more successful than a luxury hotel
- Review demand drivers such as brand and hotel management, cash flow and tax benefits
- Consider risks, gather informational data and carry out due diligence
- Ensure the hotel is attractive to business and leisure and consider growth in both markets
- Brand matters. Assess value propositions and brand hotel operators for cash flow, operating and running costs
Hotel Value
A hotel valuation should include various cash flows, in addition to customer service, reputation, food and beverage offerings, people and ambience.
Income Capitalisation
The present worth of future benefits determines income production.
- Value the hotel as an operating business using the Discounted Cash Flow method (DCF), the most used model for hotel and land real estate valuations.
- Determine if it’s better to buy or build. This does not consider income or economic factors.
- The sales comparison approach focuses on determining ranges and pricing momentum based on prior sales of comparable hotels.
A new post-pandemic trend is on the rise, and many hotels are entering the market to accommodate the demands of millennials. Hotels are sizeable investments in time, effort and money. Successful hotels are financially lucrative and can be immensely satisfying.
Buying and running a hotel could be for some investors and operators a great idea and investment. Success in the hospitality business is financially lucrative and satisfying on a business as well on a personal level. However, always remember:
- Location, location, location
- Work, work and work more
- Brand is important
- Guest experience is even more important and key to success
