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Investors rue collapse of GuestInvest

Investors who paid up to £400,000 for a buy-to-let hotel room tell us their stories, as founder Johnny Sandelson battles to buy the company back from administrators
October 15, 2008

GuestInvest's high profile advertising campaign promised investors that they could: "Earn money while others sleep". But those who parted with up to £400,000 for a buy-to-let hotel room are now suffering sleepless nights, fearing that the value of their investments could be decimated now the hotel investment group .

"We invested in GuestInvest as our pension fund had been eaten away, and we were guaranteed a 6 per cent return," says Investors Chronicle reader Rosie Bolton who paid £385,000 plus VAT for a room at The Nest hotel this August. "We paid cash, so we didn't need to take a mortgage out, and our VAT bill added a further £67,000," she says. "The administrators can't give us any answers about what will happen next. That doesn't help me or my husband, who has recently retired. It is all extremely worrying."

Sadly, Mrs Bolton* is one of around 250 investors now waiting for administrators

Deloitte to determine the next steps for the company and its assets. This could result in the sale of GuestInvest's hotels to new operators, or a rescue bid from the group's founder Johnny Sandelson.

"I am working closely with the administrators, and can confirm I am mounting a bid to buy the company back," Mr Sandelson told Investors Chronicle this week. "There is no guarantee that we will be successful bidders, although I've been approached by other potential bidders who say they want to come in behind me."

In the meantime, concerned investors are questioning what led to the company's collapse. Many blame GuestInvest's joint venture partner, troubled bank HBOS, for pulling the plug when costs overran but others fear that Sandelson's concept of the hotel room as "a new investment asset class" was doomed only to work in a rising market.

A letter from administrator Deloitte confirms that investors who have completed purchases of hotel rooms are not allowed "either to request the return of the monies you paid in respect of the Room, and/or terminate the Lease". It continues: "The administration itself does not result in the loss of your interest in the room."

One of 60 investors across the three hotels to have completed purchases on a 999-year lease, Mrs Bolton has no other option than to sit and wait.

"As far as our solicitor's concerned, we own the room," she says. "Well, you can own something, but if you have no power over it, it is useless."

The only power that room owners are left with is the right to terminate the licence which accords GuestInvest status as the hotel manager. However, the administrators point out that to do so would be "an onerous procedure" as the consent of 80 per cent of room owners is required. Furthermore, the consent of 60 per cent of room owners would be required to install a new hotel operator.

"If we decide to go down this path, how do we find out who is who?" Mrs Bolton asks. "I have no idea who the other investors are, and imagine it would be very difficult to find out."

DEPOSITS IN ESCROW?

The 190 investors who put down a 10-20 per cent deposit but have not yet completed on their hotel room purchases also face problems. The administrators have yet to determine whether purchase contracts are still binding. One City lawyer familiar with the situation believes investors could walk away if GuestInvest is liquidated, but would almost certainly lose their deposits.

One investor, who did not want to be named, said he had been informed the deposits were safely held in escrow by law firm Clifford Chance.

Administrator Nick Edwards at Deloitte confirmed that to the best of his knowledge, deposits are held in stakeholder accounts, but advised: "Not every contract is the same, and not every hotel room was sold on the same terms. The fact that an insolvecy has ocurred doesn't allow people to terminate their agreement and ask for their money back."

LITTLE ROOM FOR MANOEUVRE

Deloitte is now conducting a review to "determine the best course of action...to maximise value for the Companies' creditors including inviting expressions of interest from third parties."

Although several hotel groups and property companies are interested, woeful conditions in the credit markets will rule out many buyers. As the hotels are building sites rather than trading concerns, they are likely to be sold for way below what GuestInvest paid for them.

Potential buyers have a further dilemma - to continue with the GuestInvest model and work with investors, or embark on the risky procedure of buying them all out.

One property investor describes the 999-year leases as "a blight on the assets". And then there's the legal wrangling over management contracts and guaranteed returns that investors have signed up to. A new owner could offer to buy out existing investors - but at what price? Given the vulnerable position of those who have bought rooms, it is not hard to imagine a new owner offering 50 per cent or less of the original price paid.

Liquidity was always a concern with this model of investment, as hotel rooms could only be sold on through GuestInvest. However, there were plenty of examples of investors making a tidy return on their investments to spur on potential purchasers.

"I didn't sell out because I suspected this might happen," says Jim Dover, an accountant who purchased two rooms in The Nest, and then flipped them on to new buyers a year ago. "It is absolutely horrendous. I chose this as an alternative to buy-to-let as it seemed lower risk."

TO THE RESCUE

The difficulties of unpicking the legal agreements could be to the advantage of Mr Sandelson, who is mounting a bid for the group with fresh equity from undisclosed backers.

"We have had a number of offers from people who want to support us," he says. "If we get it back, we will honour all commitments already made to our investors, including the 6 per cent guarantee and the 52 nights stay, absolutely."

However, others question that this investment model is sustainable in the current economic climate.

"The concept of hotel room investment works, but the GuestInvest model is all wrong," says Gerard Nolan, director at property adviser Savills who is working with several potential buyers of the assets. "The model was destined to fail in my view. Firstly, with the backing of HBOS, GuestInvest paid far too much for the hotel assets as they stood. Then, having bought the hotels as trading concerns, they closed the businesses down and ripped the hotels apart. Finally, they overspent on the refurbishment. It all adds up to lots of capital expenditure, and no cashflow."

Even so, Mr Nolan believes GuestInvest's biggest mistake was to offer investors half the income from the rooms. "Offering half the income, rather than half the profit, was a bad idea," he says. "I have sold over 300 hotels in London in my lifetime. They don't make 50 per cent profit - and if they don't, why could GuestInvest? Once you add on the equivalent of a once-a-week stay for each investor, you're just giving away revenue."

A further worry for investors and hotel operators is the prospect of falling room rates. GuestInvest's first hotel charged £99 for a room when it opened, rising to £145 this year. But as the economy slows and companies cut costs, industry observers fear room rates could slide, making the buy-to-let hotel room an even less appealing prospect.

But for GuestInvest's 250 investors, it is sadly too late to check out.

*some names have been changed to protect privacy