Let it be

Tuesday 30th November 2004 15:45
Buy-to-let in the residential market has been a favoured form of investment for some time. Property is often seen as a safe investment, particularly with the recent troubles on the stock market and the current pension crisis, but now a different, slightly more glamorous buy-to-let scheme has raised its head.

Investors are now being sought to buy hotel rooms or suites and then to allow the hotel operator to rent them out to guests, returning a proportion of the revenue to the investor. The most recent company to embrace this form of investment is Alias Hotels, the trendy lifestyle chain founded by Nigel Chapman and Nicholas Dickinson. Last month it teamed up with Johnny Sandelson's property investment company GuestInvest.

Through GuestInvest, investors can buy their own room in any one of Alias's five hotels (and GuestInvest's first hotel, Guesthouse West in London's Notting Hill), stay there for up to 52 nights a year and receive a return on their investment by allowing the hotel to let it out for the remainder of the year.

According to GuestInvest, investors in Guesthouse West, which launched in March this year, have achieved a 6.5% rate of return to date and the first, and as yet only, buyer to sell his room achieved a 10% gain on the original price - in just four months.

Prices for the 20 Guesthouse West hotel bedrooms, which were sold on 99-year leases, started at £235,000. Prices for Alias bedrooms will be about £150,000.

The benefits for investors seem quite clear. If you have enough money to spare and don't plan to use the physical benefits of your investment, you can expect to make a fairly decent return. Through the GuestInvest deal, investors get 50% of their room-letting income and a 5% return on investment (ROI) on a £99-a-night letting, including their 52 days' personal occupancy. ROI increases with rising room rates and fewer personal nights. If the investor is a regular hotel user they also gain through saving on hotel bills, which converts into a £5,000 saving for the 52 nights a year they are able to use their hotel room. If this is factored into the deal, the investor's ROI increases to 7%.

Investors get tax benefits as the scheme qualifies for business asset taper relief, is a qualifying investment for pension schemes, and has the 40% capital gains tax reduced to just 10% when the room is sold.

It's also a low-hassle investment, with no management responsibilities or maintenance worries. And of course there's a certain element of kudos for the investor as they get to be a part-owner of a trendy hotel.

But it's not just investors who gain. Tim Lloyd, managing director of Platinum One Hotels, which has launched a similar scheme to GuestInvest in Christchurch, Dorset, says there are numerous benefits for hoteliers, too. The most important for him was that choosing this form of investment enabled Platinum One Hotels to develop the Captain's Club hotel.

He said the hotel was deemed unfeasible because of its size - the Captain's Club has just 16 hotel bedrooms and 12 suites. But after seeing a scheme in New Zealand that enabled investors to buy rooms in a hotel, Lloyd knew he had hit on a way to open his hotel.

Other benefits, says Lloyd, include a certain amount of protection should the industry ever experience another downturn, as the investment from purchasers allows the hotelier to reduce his residual debt considerably.

It also helps the hotelier aesthetically. "It allows us to develop to a higher standard through funding," says Lloyd. "It's a way of financing alternatively and it's been well received."

He adds that this new method of financing is helping people develop hotels at a time when it's becoming more and more expensive to build them and more difficult for new companies to secure funding via traditional routes.

And as both the GuestInvest and Captain's Club schemes make sure the hotelier is still able to manage yields, it seems like buy-to-let is a win-win situation for all parties involved.

Consultant Melvin Gold says: "This trend of different ownership is not negative, and it can be quite positive. The management company gets an owner per room and as long as the shareholders are looked after properly then everything should be hunky-dory. It should be win-win. The only real downside for the hotelier is if the owners get nasty and all start pulling in different directions."

Gold says the scheme first appeared in the USA and Canada six or seven years ago and has become popular with investors over there. But he warns that the scheme won't work in every hotel in every part of the UK, where occupancies are lower.

"It works well in London where occupancies are quite high, but I'm not sure it will work in every town and city," says Gold.

At the moment, the scheme is really open only to high net-worth individuals and large investors who can afford the £150,000 to £500,000 investment outright, as getting mortgage funding for this type of investment in the UK is relatively difficult.

But that will undoubtedly change as more and more people turn to the hotel market as a place in which to invest. The industry has shown it can bounce back from such atrocities as the 11 September terrorist attacks in the USA, the Gulf War, Sars and the general economic slowdown. After three years of difficult trading the hotel industry is now showing a strong return. And, unlike other forms of investment, a hotel - if properly looked after - can still be making money after 50 or even 100 years.

According to the Royal Institute of Chartered Surveyors, the number of private individuals investing in commercial property such as hotels has increased by eight percentage points since 2000 to 10%.

Its findings also reveal that commercial property has outperformed shares over the last decade, giving investors a 174% return, compared with 81%.

With those facts, a £300m spending spree on the cards for GuestInvest, and the added kudos of part-owning a trendy, high-fashion hotel such as Guesthouse West in Notting Hill, the Alias portfolio, and the Captain's Club in Christchurch, buy-to-let looks set to grow and grow in popularity.

GuestInvest
Hotel bedrooms are sold off to affluent private investors seeking occasional accommodation and looking for an investment vehicle, or to corporate investors who have a high spend on hotel rooms for staff and clients and are seeking cost savings.

The purchaser has a contract with the hotel to let the bedrooms out and gets access to the room for 52 nights a year, full use of the hotel facilities and a 50% share of the letting income after deduction of any third-party sales, credit-card commissions or booking fees.

At the end of each quarter, the managing agent produces a set of accounts for the investor, outlining the monies received by it for the supply of the room as a hotel room during that quarter. This amount is then transferred to the investor.

As well as the initial investment, owners pay a daily fee of £10 excluding VAT when they're staying in their room, to cover cleaning and services.

They also pay an annual fee of £500, capped for the first eight years, into a fund for major works, and an annual £250 ground rent, which is capped for the first 10 years.


The general rules (Captain's Club and GuestInvest)

The investor:
- Must have another residence.
- Must give notice before they stay in their room (up to a month).
- Can't let suites privately themselves; it must be done through the hotel.
- When selling their investment they must first inform the hotel.

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