Private landlords faced with falling house prices and a shortage of buy to let mortgage deals, or weary of the work involved in keeping their property tenanted and in good order, might well be tempted by the idea of owning a hotel room. It's one investment at least that allows you to sleep well at night - in freshly laundered sheets.
It works thus: you buy a room in a so-called 'investhotel' scheme on a long lease (along the same lines as most flats), but it remains as part of the hotel's accommodation capacity and is fully managed, maintained and let out to guests by the hotel management team. In return, you receive half of the net room revenue, typically with a guaranteed level of return for the first year or two, plus any uplift in the capital value should you decide to sell your investment. Investors who do not put their hotel rooms into a self invested personal pension (Sipp) also have a certain amount of use of the room.
In the case of the market leader Guestinvest, whose four hotels are located in central London, this amounts to 52 nights with complimentary toiletries per year. Newcomer Pestana - which cut its teeth as a family-owned chain of hotels in Portugal before branching out into the London investhotel scene with a new hotel at Chelsea Bridge - is offering investors 30 nights of free occupancy.
Pestana is charging from £295,000 plus VAT; rooms in the newest Guestinvest hotel, the Jones in Bayswater, cost from £317,000. Mortgages comparable with buy to let products are available from one or two lenders.
Isn't it just buy-to-let by a different name?
Investing in hotel rooms differs from buy to let in several ways.
The room owner has no responsibility for the maintenance or letting of the room. This sounds great, provided the management is fully committed and up to the job. But investors have no control; they are entirely reliant on the ability and determination of the management to get the pricing right, run the hotel efficiently, maintain the rooms in top condition, and, most important, keep the punters coming in.
Management's vested interest is key in this respect. Peter Booth, a director of Pestana, says: "We are only selling 66 rooms of our 218 room hotel, so we have good reason to want to make it work. We've been in the hotel business for 35 years in Portugal so we know what we're doing." Guestinvest works on a somewhat different model, selling all the rooms in its hotels, but taking 50 per cent of room returns, plus the food and drink revenue.
Rental yields have been improving on residential property in recent months, as rents have risen and capital values have dropped - but the latest figures from the Association of Residential Letting Agents (ARLA) show gross average yields below 5 per cent.
In contrast, Guestinvest promises a guaranteed 6 per cent return in the first year, but CEO Johnny Sandelson says that to date investors have earned an average capital appreciation of 9.3 per cent per annum and an average return of 8.5 per cent per annum. At Pestana, meanwhile, the 6 per cent guarantee extends to two years.
What if the economy heads south?
Hotel room rental returns are influenced by both room rates and occupancy levels, so what's the outlook? "Last year the average occupancy rate for London hotels was 83 per cent according to the annual Deloitte hotel survey," says Peter Booth of Pestana. "Even in the low points of 2001-03, when American tourists completely stopped coming here, it only dropped to 75 per cent. Our 6 per cent guarantee is based on an occupancy rate of 80 per cent at £140 per night in 2010 and 2011, while the hotel is still relatively new. Then in 2012 the Olympics will provide a major boost to demand."
Meanwhile, the global economic slowdown is likely to impact on London's visitor trade to some extent; but at present the weak pound is attracting European visitors with Euro spending power.
Importantly, the rental return received from a hotel room is all profit. Whereas conventional landlords then have to pay insurance, letting agents' fees and maintenance costs which eat into their gross returns, hotel room ownership does not involve such additional expenses.
What about capital growth? Buy to let landlords are having to deal with falling capital values at present, and commentators such as Savills believe falls of up to 25 per cent are on the cards for the residential market over the coming two years.
Can I get out if I need to?
But growth in the hotel room market is a less clear cut issue altogether. The resale market is young and potentially quite illiquid, though Guestinvest rooms can be sold in the open market through estate agents including Sothebys and Colliers. A year ago the company was quoting over 9 per cent annual capital appreciation, though Johnny Sandelson admits "there has not been much over the last 12 months".
A hotel room's capital value is a direct function of the revenue it produces; so management's aim is to put up prices without damaging occupancy rates. Of course it is not sensible to assume that past performance will hold for the future, but in recent years a shortage of good quality hotel accommodation has been driving room rates up: the 2008 Deloitte hotel survey found that London's hotel rates in 2007 increased by an average 9.8 per cent over those of 2006. However, the market could tighten in the current economic climate if occupancy rates fall.
Also, as Philip Milton, of IFA Philip J Milton & Co, points out: "There are difficulties in marketability after the event - who wants to buy a second hand room?" Certainly, if a lot of new investhotels come on stream, it could prove difficult to sell your older and perhaps slightly less swish model.
Unlike a conventionally let property, which is either rented out for months or standing empty, possibly also for months, there is much more scope for variation with hotel investments. "Hotel rooms are rarely empty more than a few days," says Sandelson. "Overall occupancy rates don't change much."
However, Jason Butler of Bloomsbury Financial Planning offers a very different take. "Hotel investment is at the most volatile end of the property risk spectrum because the rentals are for very short periods - as little as one night - and therefore highly sensitive to changes in the economic environment. It's a marked contrast with, say, a 20 year lease on an office block occupied by the UK government," he says.
One big attraction is that some Sipp providers will allow a hotel room – provided it is not used by its owner at all – to be held as a pension asset, so all rental income is paid into the Sipp free of tax. One specialist Sipp provider that will consider a hotel room is Suffolk Life.
