Room at the hotel for investors ready to take a gamble
Buying a room to let is a passive property investment, but is it easy money? Sharon Dale reports.
IN the heady days of the property boom a new style of hands-off investment emerged and with pound signs in their eyes, buyers rushed in.
Buying hotel rooms sounded like the perfect investment with 50 per cent of the profit from bookings, free stays in your room and none of the problems associated with conventional buy-to let property.
“Earn money while others sleep” was the persuasive phrase coined by the concept’s bestknown purveyor GuestInvest, which went into administration when the credit crunch bit.
Now the dust and property prices have settled and the model has been revived and expanded with the help of two former probation officers from Yorkshire.
David Burgess and Jeannie Lumb gave up their careers to concentrate on their sideline: selling homes in France, Spain and Morocco, but when overseas sales slipped in 2008, the couple launched The Hotel Investment Group.
“The Skelwith Group asked if we would be interested in selling rooms at the Flaxby Hotel, near York, that they were building and that’s when we started, says David, whose company is a member of AIPP (Association of International property Professionals)
“Selling hotel rooms as investment has its roots in the States. It’s a very simple idea. You own the room and the hotel operator gets half the income from it and you get the other. Plus you are entitled to use it yourself.
“It’s also tax efficient as you can put into a Self Invested Personal Pension.”
A double room at the Flaxby with a 999 year lease cost £200,000 and the management fee is £1,500 a year. Investors get a guaranteed six per cent return for the first 10 years.
David and Jeannie have also sold rooms at Raithwaite Hall Hotel in Sandsend, for Skelwith. These are sold out, though apartments at the Bacolet Bay Resort, in Grenada, are available from £260,700.
They have also expanded into student accommodation in Sheffield and Liverpool.
A one-bed flat in Sheffield costs £78,000 with management fees 20 per cent of gross rental income.
“The student rooms are still hands-off and fully managed for you,” says David, who is about to launch rooms for sale in a planned city centre hotel in Bradford.
The benefits of buying a room, says David, are many. The developer gets investor deposits that allow him or her to build and secure bank finance and the investor gets a hassle free, fullmanaged property.
But there are questions surrounding an investment vehicle that is still its infancy.
The main one is the exit strategy. How do you sell your asset and who to when there is no second-hand market?
“It is early days but we are going to be doing re-sales as well. In the first instance you would give the developer first option to buy the room back,” says David.
What happens if the hotel company managed the business badly or the developer goes into liquidation? What about the legal complexities of multiple owners?
“We’ve done big feasibility studies and we have done our homework. We have the best, five-star hotel operators on board. At Raithwaite Hall, it’s Solif,” says David.
“If the operator was performing badly then the developer would step in. The developer is still the landlord and there are penalty and termination clauses in the operator’s contract.”
Adrian Archer, a director at Savills is unconvinced.
He says: “It’s still very new and I find it very hard to be positive about it because it is unproven.
“First, an investor has to be cash rich because banks are not happy to lend on the rooms and there doesn’t appear to be resale market, so the exit strategy is unclear.
“Also, what happens when in five years time the hotel is tired and needs refurbishing? Does the management company ask the investors for another £5,000 each?
“The other issue is that there are lots of owners and that could be a management headache.”
If you do invest, says Adrian, then abide by that old property adage: location, location, location.
“We’ve done our homework. We have the best locations and the best hotel operators,” says David.
“It’s a niche market and it is relatively new, but it is bricks and mortar and the investor owns the asset.
“We’ve had no shortage of investors either. They’ve seen that the products and the locations are right.”
ACTION PLAN: Barcolet Bay, top, and Raithwaite Hall, two investments.