The lowdown on investing in a hotel suite
WITH the rapid growth of the tourism market, hotel suites are becoming a popular way for South Africans to invest in property.
However, this is a relatively new concept in South Africa, so a lot of people don’t understand this type of property investment, says Jeffrey Solomon, director of Solomon Brothers Property Holdings, the developer of Pepper Club, a R400 million five-star hotel residence and spa set to open its doors in Cape Town in March.
Solomon answers some questions about hotel suite investments:
What is a hotel suite investment? It is a direct property investment that enables investors to buy a suite in a hotel development in terms of the Sectional Title Act. The unit is then contracted to the hotel and forms part of a rental pool. The revenue of the hotel is distributed to the rental pool participants.
Is a hotel suite investment the same as a property syndication? No. In a property syndicate, investors collectively buy into a single property and own individual shares in that property. They don’t hold a title to their property in their own names, and syndicates generally can’t be financed by banks.
Property syndications are unlisted investment schemes and can be structured in various ways with several cost layers. They are not subject to the rules and regulations of a formal exchange so there is sometimes scope for the creators of syndication schemes to manipulate property values and investors.
Do hotel suite investments pres- ent liquidity problems? The returns generated from hotel suite investments should more than cover the investors’ finance charges, so the revenue should not experience liquidity problems. In addition, selling this type of investment should be quicker than a regular sectional title apartment, as it has a regular income stream attached. Nevertheless, it is recommended that a direct property investment should form part of investors’ overall investment portfolios, which should include some liquid assets in case they need access to cash in a hurry.
What about the lack of diversification of investing in just one property as opposed to the stock market? I believe that rather than being a drawback, an investment in a sectional title hotel suite can be an advantage, as it provides you with far more control over the selection
‘The unit becomes part of the hotel’s rental pool and the revenue is distributed to participants’
of your asset than what is possible through listed properties or property syndicates.
First, you have exposure to South African tourism which has huge growth potential, as well as the benefit of professional management and marketing of your unit as part of the hotel. Second, a sectional title ownership is a safe, well-regulated method of property ownership.
What guarantees do developers typically offer on these investments? Investors in hotel apartment investments sometimes have the option to select guaranteed returns for limited periods. Although it is true that the guarantee is only as good as the company that issues it, the same can be said of any investment product with some form of revenue.
The reality is that even if there were a corporate failure, owners of units in hotel suite investments would retain ownership of their investments. They would be free to occupy the suites themselves or rent them to tenants. Also, hotel suites have fitted kitchens so they could be used as permanent homes.
How can I be sure my unit will be occupied? As the unit is part of a rental pool, the total hotel revenue is pooled and shared between all investors. Your revenue does not depend on the occupancy level of your unit.
Occupancy rates for five-star hotels in Cape Town were 72-76 percent for the first four months of 2009, which was down about 15 percent on the same period last year. However, with several international sporting and cultural events over the next two years, including the World Cup, these rates are set to improve as the city’s exposure to a broader global market opens up.
Are there any tax benefits to investing in a hotel apartment? Do your homework and understand the investment into which you will be buying and the tax implications.
An investment in Pepper Club has some beneficial income tax allowances which can be used to reduce an investor’s tax liability on income from the hotel suite investment itself or income from any other source.
The Pepper Club development falls within a designated Urban Development Zone (UDZ), providing investors with benefits from a tax incentive of 55 percent on the price of units. The tax incentive helps to reduce the taxable income of the investor. The incentive is not limited to current year’s taxable income.