Understanding Hospitality Sector Investment
In this article we want to try and shine some light on the differences between hotel room investing, hotel residences and branded residences. Due to boom in branded residences of late, we are seeing more and more real estate agents and developers using the buzzwords of hotel residences, branded residences, hotel room investment and branded luxury homes.
However there are huge differences between these investment categories.
So let’s delve a little bit deeper into these investment options and explore the features, benefits, and potential drawbacks of both.
What is Hotel Room Investing?
Hotel room investment, is known by many names, the list of different terms can actually be rather confusing, but basically you are buying a hotel room or a fraction of a room, within an operational hotel. These projects are not branded residence developments, please be aware of this when you are considering this investment.
This investment model is normally marketed as bridging the gap between traditional property investment and the hospitality industry. It is very important to understand that these are not residential property investments, however depending on the project ownership benefits they may include free stays.
Hotel Room Investment Key Features
- 1. Ownership of a specific hotel room
- 2. Professional management by hotel operators
- 3. Revenue sharing from room rentals
- 4. Potential for personal use (subject to agreement terms)
Potential Advantages of Hotel Room Investment
1. Lower point of entry. Hotel rooms tend to have a much lower entry price point, It is normally offered as investment for small-scale investors who want to diversify their portfolio.
2. Higher yields. We have seen hotel units advertised to yield is 3-4x higher than apartments, condos or houses. This in our opinion is a bold marketing claim that we cannot verify, but this figure does seem overly high to us. Hotel room investors, generally are told to expect returns around 5-12% Per Annum.
3. Lower-risk While most property investments carry less risk, hotel rooms are marketed as an even safer bet, due to the fact that you are normally investing in a well known brand.
4. No hassle. Your room is leased back to the hotel operator/management company. Furniture, furnishings, maintenance, cleaning, occupancy, and dealing with tenants or guests are all handled by the operator or management company who is responsible for maintaining the property and filling the hotel with guests.
5. Passive income. Unlike traditional real estate, with hotel room investing you can earn returns regardless of whether your owned unit is occupied or not, returns are normally pooled amongst all owners, and then shared equally.
In some schemes you are paid a guarantee for up to 5 years, other developments the revenue is shared which is normally on a 60/40 basis, other projects will share the net profit which could be on a 50/50 basis. Every hotel room investment projects seems to be different.
Disadvantages of Hotel Room Investment
- Market volatility and seasonal fluctuation affecting occupancy and room rates
- Limited control over property management
- Potential for high management fees
- Dependency on hotel’s overall performance for returns
- Non Residential
- Possible Ownership Restrictions
- Unfavourable Reputation with many people assuming it is a timeshare investment
- Sometimes sold aggressively like a timeshare
- Resales can be difficult
- Most schemes are a fractional investment (hence the lower entry point)
Understanding Branded Residences
Branded residences (sometimes referred to as hotel residences) are elite luxury residential real estate associated with high-end hotel chains or world class lifestyle brands. These properties offer a unique living experience combined with the exclusivity of being branded and named with a prestigious brands.
Branded Residences will mostly be hotel managed with an onsite hotel also, however with the luxury non hospitality lifestyle brands, you will particularly find these to be standalone branded residences, which means there is no onsite hotel but they offer facilities and services and are managed in a way that you would expect from a 5 star hotel.
With some branded residence projects, you can leaseback your home to the hotel operator, who will then use it as part of their room inventory. You will receive a return based on the hotel/room performance, this is particularly popular with branded beachfront villa projects.
You can normally negotiate how many months of the year that you will occupy your home, and how many months you wish for it to be earning you revenue.
Key Features of Branded Residences
- Elite Residential property in the very best locations
- Association with a luxury brand (e.g., Ritz-Carlton, Four Seasons, Armani, Aston Martin)
- High-end amenities and services
- Often part of a larger mixed-use development including onsite hotel
- Potential for rental program participation
- Potential for capital appreciation
- Strong resale appeal due to brand association
- Potential for higher rental returns than traditional real estate offerings
- Fully managed turnkey homes
Challenges of Branded Residences
Whilst branded residences are viewed as best in class luxury homes, there are still some things that buyers should be aware of. Considerations such as the length of the branding agreement, the sharing of facilities between residential owners and hotel guests, who controls management and maintenance etc.
In our opinion the positives far out weigh the negatives. But please be aware also of:
- Higher purchase prices compared to non-branded properties
- Ongoing fees for brand-associated services
- Potential limitations on personalisation due to brand standards
- If there is an onsite hotel expect that shared common areas and facilities will be busy during peak travel times, and therefore offer less privacy
Comparing Hotel Room Investments and Branded Residences
While both investment options are tied to the hospitality sector, they are as you can see, very different to each other. Below is a summary of some of the differences.
Ownership Structure
Hotel Room Investments:
- Investors own a specific hotel room
- Limited control over property usage and management
Branded Residences:
- Full ownership of a residential unit
- Full control over property usage
Management and Operations
Hotel Room Investments:
- Fully managed by hotel operators
- Investor has no involvement in day-to-day operations
Branded Residences:
- Professional management of common areas and amenities, by an experienced hotel company or management company
- Owners have more control over their individual branded homes
Income Potential
Hotel Room Investments:
- Income based on room occupancy and rates
- Revenue sharing model with hotel operator
Branded Residences:
- Potential for rental income if participating in a rental program offered by the developer or operator
- Full flexibility in deciding rental terms and periods
Property Appreciation
Hotel Room Investments:
- Value tied closely to hotel’s performance and reputation
- Limited audience and selling restrictions may apply
Branded Residences:
- Potential for significant appreciation due to brand association
- Ability to enhance property value through personal upgrades
- Property will be regularly maintained like a hotel and therefore will maintain its exclusivity
Investment Entry Point
Hotel Room Investments:
- Generally lower initial investment with fractional investment options also
Branded Residences:
- Higher initial investment required
Target Market
Hotel Room Investments:
- Attracts investors looking for hands-off, income-generating assets
- Appeals to those interested in the hospitality sector without full hotel ownership
Branded Residences:
- Attracts high-net-worth individuals seeking a luxury residential home, offering lifestyle and prestige
- Appeals to both end-users and investors looking for premium properties
Summary
So here you have it, we hope you have found this article helpful and it has gone some way, to give you a better understanding of these 2 very different sectors, which recently have been associated together, when in reality there is no way that they should be, in our opinion.
Obviously if you are considering one of these options, please talk to a licensed professional and carry out strong due diligence.
Thanks for reading!!
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BRESI is the world’s first platform dedicated to the selling and marketing of branded residences. BRESI is an exclusive platform for owners, developers, and hotel groups to promote luxury branded residences
Our goal is to highlight the best branded real estate for sale around the globe, and to provide insight and news from the sector
DISCLAIMER: All information in this article is for information purposes only. For more detailed information please visit the links cited in the article. BRESI claims no copyright to any of the images.
