Tougher tax regimes, stamp duty surcharges and stricter regulatory requirements for landlords mean the erstwhile honeypot of the property investment game, i.e. traditional residential buy-to-let investments, are slowly making way for alternative commercial property investments, such as hotel room investments and purpose-built student accommodation investments (PBSA).These commercial property investments present a greater net yield to investors as they are not subject to paying stamp duty, which will often take a significant chunk of investor profits.
PBSA has been the top returning asset class for around 5 years but hotel investments are likely to take that title moving forward.
The Growing Profit Potential In Hotel Room Investments
Reports published by the hospitality recruitment platform Adia, suggests that the hospitality sector in the UK will generate £100 billion by the end of 2018. According to VisitBritain, hotel rooms in the UK have had an average occupancy rate of close to 80% (77.6%) for the first 8 months of 2018.
Demand for British hotel rooms continues to be fuelled in the long-term by the relatively weak pound that attracts international tourists and the increase in staycations for local tourists. In the short-term, important events like the ICC Cricket World Cup (hosted by England and Wales) and the Gymnastics World Cup in 2019, among other attractions, will also ensure a steady stream of travellers looking for holiday accommodation over the coming year.
According to PWC, the Average Daily Room Rates (ADR) and Revenue per Available Room (RevPAR) are also set to grow during 2019, with both the London market and provinces across the country projected to see increases.
The PBSA market is still performing well in certain regions but uncertainties surrounding Brexit, over-saturation in popular student cities and a maturing sector mean that student accommodation investments for the 2018/2019 academic year are actually on a downward trend.
Both hotel room and PBSA investments benefit from a number of advantages over traditional property investments. They are fully-managed so owners do not have to worry about repairs, maintenance or even advertising of available rooms. They are also exempt from paying Stamp Duty because of their commercial property status.
However, hotel room investments do have a number of additional benefits that make a big difference in the type of investment strategy and reduce the amount of risk an investor has to accept.
Hotel Room Investments Come With A Built-in Exit Strategy
An assured exit strategy, in the form of a buy-back option, protects investor capital, ensures a guaranteed profit at the time of exit, and protects against fluctuating property prices.
For example, if you invest in a hotel room for around £70,000, you will have a contractually-assured buy-back option, which kicks-in at the end of the 5-year investment term, of 120%, equalling an exit sale price of £84,000 (a capital increase of £14,000 or £2,800 p.a.). All while enjoying assured NET returns of 10% over the same period.
There are a number of benefits for investors of a buy-back option:
- It is impossible to accurately predict property prices 5 or 10 years down the line and with a buy-back option, investor capital is protected from the beginning.
- Investors know they will receive a profit when selling the property.
- It is ideal for beginner investors with limited industry knowledge, as well as for seasoned investors with a busy portfolio. The terms are laid out in the contract so no need to deal with agents, communicate with buyers or enter into negotiations – the hotel management company will buy the room back themselves.
- An assured rental income period coupled with an assured buy-back option at the end of it provides for a lucrative investment option that gives investors unprecedented peace of mind.
Although PBSA investments might come with a rental assurance period of 2 to 5 years, it is very uncommon to see a guaranteed buy-back option included in the contract.
So with high levels of student accommodation development in popular student towns, such as Liverpool and Manchester, the market is becoming saturated. Therefore, if the investor’s rental assurance period elapses after 2 to 5 years, without a guaranteed buy-back option they may struggle to get new tenants, get required levels of rent or even sell the property, as students would likely prefer to live in the newer built accommodations.
Hotel Room Investments Offer Better Returns
Hotels are a ‘going concern’ business with proven track records, positive online reviews, documented revenue histories and growth plans. These elements are not just good from a customer satisfaction point of view but also help to instil investor confidence.
Continued customer satisfaction means good occupancy rates and, as a result, investors can be offered high NET yields of 10% per annum. Investor confidence means 120% buy-back options or higher are common as hotels will easily be able to resell investment rooms.
Although still high, PBSA investments will typically produce yields of around 8%. However, without guaranteed buy-back options, coupled with mostly off-plan builds and a lower yield, it makes for a riskier investment option.
Student accommodation rental prices could also be affected by the wider property market, which could influence occupancy if rents become unaffordable. Hotels, on the other hand, are mostly used for short-term holiday or business rentals. That means customers are more likely to pay the stated room prices, high or low, because they don’t have to make a long-term commitment. In turn, occupancy is likely to be consistently high if the hotel is ideally located to the required amenities (city centres, conference venues, cultural attractions, etc.).
The low risk/high return and low maintenance nature of hotel room investments mean that this alternative asset class has grown significantly in popularity over the last few years. This is evident through the comparable increase in investment activities.
According to a research by Knight Frank, £5.5 billion were invested in the UK hotel market during 2017, representing a 44% increase from 2016.
PBSA, while still performing well, only saw £4 billion invested in comparison, representing a lower year-on-year increase of 25%.
Hotel investments also provide faster returns. It’s a running business and there is no need for refurbishments as rooms are maintained on a daily basis. Therefore, as soon as the full property price is paid, investors will start seeing returns.
Low risks/high yields and fast returns, compared to the higher risk of PBSA investments, including buying off-plan, market saturation in popular student cities and no guaranteed exit strategy once the rent assurance period is finished, means hotel investments are likely to take the title from PBSA investments as the top returning asset class in the future.
The demand for investing in hotel rooms will always be there, especially in popular tourist destinations such as the UK, which was named the number one hotel investment country in Europe by CBRE.Ultimately, it is a secure way to invest your money for 100% passive income while protecting, and in fact increasing your capital over the short and long term.
At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.
We also work with experienced investors to help them increase the value and profitability of their property portfolios.
To book your complimentary property investment consultation with one of our senior portfolio managers simply click the button below and complete the short form and we will call you back at the appropriate time