THE REALITY OF REAL ESTATE HOTEL INVESTMENT

If considered carefully, investing in hotel real estate can be a profitable endeavor. Christian Salloum, managing director of Brandportunity Hospitality Consultancy, takes a closer look at the different types of investment and how to get the ball rolling.

Over the past decade, investments in rooms and hotels have been changing. Individual investors are buying rooms, while hotel operators are venturing into purchasing potential hotel buildings.

What is hotel real estate?

Hotels are different from all other types of property. They are operationally complex and depend on nightly rentals compared to short- or long-term lease. Hotels are highly responsive to changes in the market, such as low and high seasons. This flexibility meant that the industry faced massive disruptions during the pandemic.

Types of hotel investment

Hotels are categorized according to their service offerings and amenities.

Full-service hotels

Full-service hotels offer accommodation, retail, spas, event spaces, restaurants, bars, room service and sporting facilities. They rely on large numbers of staff and include world-famous chains, such as Hilton, Marriott, IHG and Accord.

Select-service hotels

This category includes hotels such as Aloft, Hilton Garden Inn and Hotel Indigo. They combine a mix of full- and limited-service hotel offerings

Limited-service hotels

These properties don't offer any restaurant or banquet facilities. Some offer amenities, such as a swimming pool or fitness center. Examples include Comfort Inn and Hampton Inn.

Extended-stay hotels

Embassy Suites, Staybridge and Hiltons' Homewood Suites are great examples of extended-stay hotels. Providing temporary suite-style rooms with at-home features, such as a kitchenette and laundry facilities, this property type largely caters to families who are relocating and business travelers on long-term projects.

Budget hotels

Hotels such as Days Inn and Ibis Hotels keep their costs to a minimum by providing limited amenities, services and assistance.

Key data to consider

- Average Daily Rate (ADR) – divide room rate by rooms sold over a select period

- Revenue Per Available Room (REVPAR) – total room revenue divided by the number of available rooms It is essential for hotel owners and operators to understand the offered in daily, weekly, monthly and annual REVPAR trends. Comparing competitors’ REVPAR hotels to accurate performance analysis is also beneficial.

Key elements to success

There are two main types of tourism: leisure and business. Business travel tends to occur on weekdays, while tourists drive demand at weekends and during the holiday season. To run a hotel business, operators or hotel owners should recognize the factors that lead to success.

An optimal business mix in any specific market is fundamental. Seasonal demand is commonplace for ski and beach

resorts. Food and beverage events and entertainment can also boost sales and income.

Getting started

Investors should:

- Conduct an ADR and REVPAR metric across a group of similar hotels in the same market

- Assess operating efficiency and profit margins

- Consider price and profit, noting that a budget hotel may be far more successful than a luxury hotel

- Review demand drivers, such as brand and hotel management, cash flow and tax benefits

- Consider risks, gather informational data and carry out due diligence

- Ensure the hotel is attractive to business and leisure travelers, and consider growth in both markets

- Assess value propositions and brand hotel operators for cash flow, operating and running costs

Hotel value

A hotel valuation should include various cash flows, in addition to customer service, reputation, food and beverage offerings, people and ambience.

Income capitalization

The current value of future benefits determines income production.

- Value the hotel as an operating business using the discounted cash flow method (DCF), the most commonly used model for hotel and land real estate valuations. - Determine if it's better to buy or build. This does not consider income or economic factors.

- The sales comparison approach focuses on determining ranges and pricing momentum based on prior sales of comparable hotels.

A new post-pandemic trend is on the rise, with many hotels now entering the market to accommodate the demands of millennials. Hotels are sizeable investments in time, effort and money. Successful hotels are financially lucrative and can be immensely satisfying.

For some investors and operators, buying and running a hotel is a smart investment. Success in the hospitality market is financially lucrative and satisfying on a business, as well as on a personal, level. However, always remember:

- Location, location, location

- Work, work and more work

- The brand matters

Guest experiences make all the difference. brandportunity.com

To run a hotel business, operators or hotel owners should recognize that an optimal business mix in any specific market is fundamental.