Why Would You Want To Invest In A Hotel Room?
Although it’s one of the strangest forms of property investment, it could just catch on. The idea is simple: you buy a hotel room on a 999-year leasehold. Prices range from £50,000 to well over £250,000. In return, you get 52 nights a year free accommodation at the hotel; the rest of the time the hotel lets out the room on its usual terms. You typically earn 50% of the income from occupancy, and can put it into a self-invested personal pension (SIPP), so any income and capital growth are tax-free.
Guest Invest was the first company in the UK to promote this scheme in several central London hotels. Owner Hotel is now selling rooms in two four-star hotels in Hull and York, and is building a low-cost hotel with much smaller rooms in Hull. Four Pillars is running the Cotswold Water Park scheme, where it is selling buy-to-let hotel rooms aimed at the tourist market. And developer Galliard Homes is building a 900-room buy-to-let hotel opposite the House of Commons in central London.
It sounds like a good alternative to investing in a flat or house in city centres, where there may be a saturated market for renting. But there are risks. First, there is no established resale market to prove if hotel rooms appreciate over time.
Studies in the U.S. suggest capital appreciation will mirror the mainstream housing market,
says David Galman, of Galliard Homes.
He points to a study showing hotel rooms in Manhattan rising in value by 25% over four years, and another by UK hotel analysts The Bench, predicting increases in London room rates.
Second, it may be hard for investors to get a mortgage.
There’s not much appetite among lenders for this investment, which, in the past, has been considered riskier than conventional buy-to-let,
says Melanie Bien, of Savills Private Finance, a mortgage broker.
We have a pool of lenders, among which there used to be three willing to give mortgages on hotel rooms. Now they’ve withdrawn those deals.
But Guest Invest and Owner Hotel have their own finance deals.
We sold rooms in York and Hull in a very short time. The interest rate we offered was 4% above base rate, but still we sold well because of the high returns on offer,
explains Andy Woodcock, the developer behind Owner Hotel.
We’re now re-arranging deals at between 1.4% and 2% above base rate.
A third danger is a possible slump in hotel usage. Although Owner Hotel offers a 10% guaranteed rental income for the first two years of ownership, the investor must then rely on the market.
If there is a global shock – another September 11, for example – leading to reduced business and tourism, then occupancy could drop dramatically.
That’s why we haven’t chosen the sexiest locations such as London, Paris or New York,
says Mr Woodcock.
We’re looking at new schemes in Halifax, Gloucester, Glasgow and Bath, where we reckon there’s a shortage of goodquality, mid-cost business hotels. We think these will withstand any slowdown.
Buying a hotel room may be for the brave, but this room service may well work in your favour.