• 10 December 2018
How Difficult is it to Invest in a Hotel?

How Difficult is it to Invest in a Hotel?

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Dreaming of becoming a hotel owner? Got a piece of land in a prime location? Have some capital that you want to invest? This might not be all you need if you are contemplating jumping into investing in a hotel.

Hotel Intel has spoken with several of our investor sources to dig deeper and find out all the information that you might want to consider before investing in a hotel.

Choosing a Management Company

If you don’t want to start from scratch in building your own brand, you will need a management company that you could trust. But, which one?

Fortunately for owners of hotels, there are a wide variety of highly capable management companies available in Asia. These range from the privately owned, smaller Asian operators to the large-scale publicly listed western hotel chains. Many of these companies offer a choice of hotel brands depending on the positioning and business model of the property*.*

The first thing you need to do then is to be honest with yourself and be certain of the nature and the size of your hotel and then match it with an operator.

Anthony McDonald, CEO of BHMASIA gives some advice:

*‘Know what other properties your operator has, then ask yourself “ is it conflict with my property or will it promote property?”. Chemistry between you and your operator is another factor, however it’s important to remember that in a lot of big companies the person you deal with initially might only be your ‘contact person’ for a limited amount of time before they move on to somewhere else. So while chemistry is important, you can’t rely on chemistry alone’ *

Where to Put your Money

There are several hot spots in Asia with high demands such as Perth, Yangon, Dhaka and even Papua New Guinea.

I personally like Sri Lanka which – from a tourism perspective. It resembles Thailand 30 years ago and offers a lot of opportunities in the hotel sector: pristine beaches, a welcoming (predominantly Buddhist) population, an amazing ancient culture, delicious cuisine, lush scenery and an amazing biodiversity. ONYX is in the process of opening multiple properties in the country, which are bound to be profitable.’ says Markus Aklin, the Vice President of ONYX.

Anthony on the other hand ‘If it was me, I’d go for Myanmar’

Remember that, these hot spots have their own challenges; sky high land price, political unstable, bureaucratic obstacles that need to be taken in consideration.

Avoid Avoidable Mistakes

The biggest mistake hotel owners tend to make is having the idea that ‘I will have what John has’. Such a vague scope means that know defined objective or reason as to why the hotel is built has been set. The decisions on how to design and position the hotel may be based on instinct or emotion rather than research or being market driven. This can result in highly unrealistic expectations in respect of the return on investment*.*

*‘It is always advised to spend time studying the market and its trends before settling on a design or concept. Engaging hospitality consultants and an experienced hotel operator early is key here as they usually offer the expert’s perspective, which will help in the creating of a product that is relevant in the market and is built according to a realistic program and budget. Hiring professional designers and cost consultants from the start will also help mitigate these risks for as long as they are selected based on their reputation and ability and not just price.’ *Markus added.

Anthony added ‘*Many owners don’t engage with operators enough. There was one project that has been worked on for six months and the owner had forgotten all together to include a restaurant in the plan.’ *

On the financial side, he adds *‘Very often, owners don’t understand the financial scale and that is dangerous’ *

Not your Typical Investment

Markus continues to say ‘Hotel owners are investing directly in “bricks and mortar”, as opposed to a paper-based fund. Hence the investment is asset-backed for security and peace of mind. A key benefit over other forms of property investment is that it can be a truly passive investment when an investor chooses to partner with a hotel operating company. The Operator does all the work like maintenance, upkeep, marketing and is incentivized to do it well by the fees it charges and as a result, keeps the investors’ profits as high as possible. Successful investments returns are typically in the high teens and above – and that’s net of all costs. Typical landlord yields may range much lower and come with possible hassles and expenses such as maintenance, lettings and tenant management, and troubleshooting with tenants.

Investing in hotels it seems is not your normal investment. The right location, the right vision and the right operator are all key factors in making the investment a success. Choosing investors is also important. You need to know what other investors want back from their investment. While larger investors might look to sell the hotel on after a couple of years, more family oriented investors might be looking at getting regular long-term cash flow from their investment.

Positions and priorities from both the investors’ side and the management company’s side must be very clear and making sure that there are clear lines of communication between the two as things progress and change are essential to surviving the fluctuations and changes in the market as they occur and ensuring that the investment is a profitable one..

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