The low­down on in­vest­ing in a ho­tel suite

Weekend Argus (Saturday Edition) - - PROPERTY -

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.

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