How to put a hotel room in your pension
By ChrisGilchrist    26th March 2008



Like the idea of a property investment but not too keen on the UK buy-to-let market right now? You could buy a hotel instead.

Not a whole hotel, but a room in a hotel. GuestInvest, which pioneered the idea in the UK, has sold out three London hotels since it started in 2004 - Guesthouse West, Nest and Chiswell Street.

They claim the original Guesthouse West investors have seen the price of a room on a 999-year lease rise from £235,000 in 2004 to £315,000 today, the equivalent of 9% compound.

High occupancy rates are key to returns
Owners get 50% of the income and have the right to stay in their room 52 nights a year if they want - something that has clearly appealed to many buyers. You can even buy a room for your pension fund, though if you do, you can't stay in it.

GuestInvest is operating in Planet London, where the average room costs £150 per night (the highest average rate in Europe) and, despite steady increases in capacity, the hotel industry recorded an overall occupancy rate of 73% in 2008.

GuestInvest claims an occupancy rate of 87% at Guesthouse West, making it highly profitable for operators as well as owners.

buy the eggs, they buy the goose
But why should operators with golden eggs like these sell their goose? The answer is that they wouldn't have the goose at all unless they did. Essentially, by pre-selling rooms, GuestInvest borrows your money to build its hotel.

That reduces the amount it has to borrow from the banks, making it a safer lending proposition - and these two factors together mean much lower financing costs. Then when the hotel is built, it has a long-term agreement giving it 50% of the income from your room as well.

Look at it like this and you realise just how clever the concept is from GuestInvest's point of view - it uses your money to buy the goose and then gets 50% of the cash from selling the eggs.

Other companies are following suit
Imitators are starting to arrive. Ownerhotels has several hotels in Hull, including one with 'pods' selling for £50,000 that it claims are capable of generating £7,500 a year in income (at £49.99 a night) before management charges. Other regional centres are sure to see the concept before long.

So what could go wrong? Many things, of course, but it all really comes down to one thing: occupancy rates.

That is what makes hotels profitable (or not), and the past ten years have seen just one blip in a long boom caused by falling air fares, leading people to take more short-term breaks in Europe and boosting hotel occupancy rates in tourist hotspots from Valencia to Bucharest... and London.

How many want to stay?
But do not forget two key facts about London. One: 12% of all its tourists in 2006 came from the US, but with the 2-dollar pound, we can be sure less of them will be coming in 2008.

Two: a high proportion of the top-rate hotel rooms are occupied by businessmen. So here, in a nutshell, is the vulnerability of this form of investment. After 9/11, London hotel occupancy plummeted. And a real economic recession - as in 1979-81 - would probably lead, as it did then, to hotel closures and bankruptcies.

There is another risk factor, in that not many lenders will finance hotel rooms. So if you want to sell your room, the pool of potential buyers is much smaller than with conventional property, where scores of lenders offer mortgages. That doesn't matter during a boom, but it surely will matter in a bust.

Provincial cities have bigger challenges
What applies to London applies, in spades, to Hull and most other UK cities that are not already tourist meccas. In these less-favoured locations (I am being polite to Hull), any drop-off in tourism is likely to cause a sharper drop in occupancy rates.

If it takes an 87% occupancy rate to produce a net return of 8% at GuestInvest, occupancy rates of under 70% - not untypical in the provinces - could result in very poor returns. But that is an optimistic scenario, because a hotel with persistently low occupancy rates is likely to close.

In this case, the operating company would go bust, leaving a set of long leaseholders with the job of finding a new operator for the business- or more likely, being forced to accept a distressed-sale price for their investment.

Test for risk
As usual, I emphasise the negatives only to make the point that this is not a simple and straightforward investment but one where you do have to look under the bonnet and kick the tyres.

At the least, you should run a 'What if?' scenario based on lower occupancy rates and an inability to sell for several years, since this is the true downside of the investment.

With stocks and shares, the risks are all upfront and in the price every day. Those daily price variations scare you into thinking there is lots of risk. With property, it's easy to be convinced the risks are negligible.

But if you have financed a purchase with borrowed money the risks are greater - one sure rule in investing is that gearing always increases risk. And because property price adjustments often come in the form of sudden disasters, the true level of risk isn't so apparent.

A hotel room may turn out a great investment, but it certainly isn't risk-free.

Article produced by EveryInvestor.co.uk