Hotel investments are an increasingly popular option for investors seeking strong returns, especially at a time when the buy-to-let market is undergoing dramatic changes.

In 2015, UK hotel investment hit a nine-year high, according to Savills. The advisor reports that total transaction volumes in the UK hotel market reached £8.1 billion, an increase of 31.6 per cent on the £6.1 billion full year total in 2014.

Demand for the sector has increased in recent years, attracted by the strong returns available. Indeed, while the best hotspot in the UK for residential buy-to-let is Manchester, according to HSBC, offering rental yields of 7.98 per cent gross, hotel properties such as the Caer Rhun Hall in North Wales (with units ranging from £75,000 to £180,000) offer an annual NET rental income of 10 per cent.

Why do hotels offer significantly higher yields than other investments?

One of the biggest differences between a hotel room and residential buy-to-let is that the initial outlay is often far lower: investors are not investing in an entire house or apartment, but a room within a larger property. The income then comes from hotel’s operation.

According to PwC, hotels in the UK excluding London saw a 10.4 per cent revenue per available room (RevPAR) growth in 2014, with further growth of 4.2 per cent forecast in 2016.

Because the property is managed by the hotel company, investors do not have to worry about lettings, repairs and maintenance costs. The hands-off element saves time, but also makes true yields significantly higher than other forms of investment. The hotel management company also makes an effort to keep the hotel’s occupancy rate as high as possible, which means that investors are less vulnerable to vacancy rates. Income is therefore often guaranteed, as well as high.

The unit itself can also benefit from capital growth, with investors able to resell their units on the open market or, often, as part of a buy-back arrangement with the hotel management company.

A further benefit to UK investors is that commercial property can be placed in a Self Invested Personal Pension (SIPP), which means that capital growth and earnings can be tax free.

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But do these higher returns come at a price?

There some potential risks that investors in hotels should be aware of, such as the reliability of the developer.

It’s something that Select Portfolio was careful to ascertain with Caer Rhun Hall. The Grade II-listed building is being revitalised by some of the country’s finest hotel developers, transforming the Welsh mansion from an established accountancy school and wedding venue to a luxury hotel, spa & more.

“Investors should also take into account the hotel’s location,” advises Michael Reilly, Sales & Marketing Director at Select Portfolio. “If the hotel does not attract enough custom, due to an unpopular area or high competition from other hotels, occupancy rates may be lower than anticipated. Caer Rhun hotel is in an idyllic location, just six miles from the A55, which connects to the motorway network for access to all major areas across the northwest, so we are confident about its location, occupancy rates and appeal.”

Finally, the market value of the room may also be inflated, which could mean that selling on the room could prove less profitable, cautions Michael.

Capital growth may be low if the hotel also requires refurbishment – although Caer Rhun’s full renovation is already planned and in place, he notes. At the end of the initial 10-year term, there is also a 125 per cent assured buy-back, ensuring that investors benefit from long-term returns. (Alternatively, investors may sell their property on the open market at any given point.)

“By purchasing a room at Caer Rhun Hall, you’ll benefit from a 10 per cent NET rental income paid annually in arrears direct into your bank account. Unlike a traditional buy-to-let, you are not responsible for any management fees, property maintenance, refurbishment or tenant related issues,” concludes Michael. “This opportunity provides a hands-off, hassle-free, income generating asset.”

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