BUY TO LET HOTELS – ADVICE FROM LETTINGFOCUS.COM

Is it sensible to invest in rooms in buy to let hotels asks David Lawrenson

Buy to let expert David Lawrenson of www.LettingFocus.com looks at the phenomenon of buy-to-let hotels and asks whether they are good value for money as property investments.

In April 2004, property developer Guestinvest, part of the Design Hotel Group, launched a scheme allowing property investors to buy a room in a 20 room hotel on a 999-year long lease and rent it out, hopefully for a profit.

The hotel was called “Guesthouse West” and is situated in Westbourne Grove, Notting Hill in west London.

The scheme went well with the rooms sold out within about two months.

Initially, the idea seemed to be catching on. Another scheme was built by Galliard Homes and is just opposite the House of Commons on the south side of Westminster Bridge. The rooms in this fourteen storey hotel will also come on a 999-year long lease.

Prices in the Westminster Bridge scheme go to well over £1m for a penthouse apartment suite and the property should be completed by 2010 and comes with a guaranteed rental return for 5 years.

Are Buy to Let Hotels a Good Investment?

On the surface it all looks good. With the Paddington Guestinvest scheme, you also get a room that you can use for fifty two nights a year. For the rest of the time it is let to hotel guests and the income is split half and half between the investor and the firm.

There is also a hefty annual maintenance charge but initial projections promised a return for the property investor of 6.3%.

Guestinvest say that the investors in the Notting Hill earned an income of 6.5% a year after charges in the initial years so occupancy must have been around the 77% mark.

How Does it Compare to Other Buy to Lets?

Obviously this looks pretty good when compared with a more standard buy-to-let in London where 5% net income return on total capital (excluding capital gains on the property) would be seen as a good return, especially at the high end of the market.

Not only that, but with the hotel scheme you wouldn’t have the hassle of day to day management either – a factor which is always considerable where you have up-market tenants paying premium rents and expecting a premium service for it.

Void Periods in buy to let hotel rooms

One of the keys to success as with any property investment is whether the rooms can be let out successfully.

And instead of talking “void periods” as you would with a normal buy-to-let, you would need to think more like hoteliers and talk about “occupancy rates” instead.

If you “flex” the occupancy rates rate a bit, you’ll see that if occupancy drops to 60% (or 219 nights), the net income falls to 5%. At 50% occupancy it is 4.2%.

Whether occupancy and hence income levels are sustainable depends very much on the global economy.

The London hotel market, just like all up-market rentals such as serviced apartments and top level buy-to lets, are driven more by changes in the global economy than say other types of buy-to-let.

Prices of up market property and rents can sometimes be hit first by any global downturn but the 2008-9 credit crunch shows they are usually the first out of any recession too.

Other Risks

There are other considerations effecting occupancy. Shocks like terrorist incidents are likely to be targeted in the bigger cities, especially the capital and will have an undoubted impact on people’s willingness to visit.

And of course, as with any buy-to-let investment, there is the issue about supply - too many other hotels in the area and the income will be bound to go down. So potential investors should check out how many other hotels are planned in the area.

Investors should also look at the type of rooms on offer. At the Westminster Bridge development many rooms have kitchen facilities so are suitable for longer term guests who may stay for a few weeks or even a few months.

Competition from Serviced Apartments

This means that in terms of competition, this kind of buy-to-let hotel is up against both the privately owned and let “serviced apartments” (in which tenant- guests can expect a daily maid service, clean towels and the like) as well as the upper end of the conventional buy-to-let market.

For both new schemes you have to buy off-plan, so as with any off-plan investment you have to imagine the hotel from the architect’s drawings and take a leap of faith into the future.

Mortgage Loans for Buy to Let Hotel Rooms

In terms of mortgage finance, you will have to get a commercial type of loan and pay a higher interest rate than you would on a more traditional buy-to-let property. Post credit crunch lenders are much more wary so finance will be very hard to find and more expensive.

The legal and long term tax, especially capital gains tax consequences of these types of buy to let investments should also be looked at carefully though investors should note that some of these investments are Sippable (providing certain conditions are met)

It must be said that there is a bit of scepticism from the hotel industry. For example, TRI Hospitality Consulting in a survey of hoteliers 35% said they saw these hotels as a “short term gimmick likely to result in legal disputes.”

This scepticism looked well placed when in 2008 GuestInvest had its bank funding pulled. Many investors in the scheme are now very worried about when and if they will be able to realise their investment.

In summary, investors should take a look at these alternatives to traditional buy to let property investments but proceed with caution and be aware that getting out of the investment may be difficult -as there may be few buyers interested and little resale market.

About David Lawrenson and Lettingfocus.com

If you need more advice on buy to let hotels or buy to let investments in general please ask me.

I’m David Lawrenson from buy to let experts LettingFocus.com.

We offer unbiased information for landlords and corporates through our seminars and one to one consultancy.

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