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Buy-to-let market – room for more?

19 June 2008 by
Buy-to-let market – room for more?

The buy-to-let hotel room model is gaining momentum in the UK, yet many experts are still sceptical. Rosalind Mullen finds out why

When GuestInvest launched its buy-to-let concept in the UK in 2004, the idea of sinking thousands of pounds into a hotel room and splitting the profit with a member of the public gave sceptics a field day. Today, the buy-to-let hotel deal appears to be gaining credence, but is there any evidence of its long-term viability?

Chief executive and founder Johnny Sandel­son is one person who is convinced it is here to stay. When he opened his pilot venture, the 20-bedroom Guesthouse West in Notting Hill, Sandelson sold the rooms on a buy-to-let deal for £250,000 each. Four years later he's raising the game. Sandelson has recently snapped up the A-lister's dream hotel Blakes, and he's on target to open three more design-led hotels in London, facilitated by a £140m joint venture with the Bank of Scotland.

The hotels will be operated by GuestInvest's management arm, Guest Hotels. First to open in September will be the 157-bedroom Nest and 176-bedroom Jones hotels, followed by the 200-bedroom Chiswell in 2009 (see opposite). Rooms start at £317,000 at the Jones, where a third have been snapped up. The Nest rooms are sold out and the Chiswell is 50% sold.

"We have investors from 20 countries. They want a hassle-free investment, a good return on investment and somewhere nice to stay," Sandelson says.

Under the scheme, investors buy a room on a 999-year lease and can stay free for 52 nights a year. That person earns 50% of the room's income and a guaranteed first-year return on investment of 6%, plus any capital appreciation when the investment is sold on. The hotel takes the other 50% of income, ensuring its interests are aligned with the investor, and funds the marketing and management, although the investor pays a service charge capped at £500 a year for seven years and matched by the company.

And GuestInvest is not a lone pioneer. Other developers that are setting up deals on a similar basis include Galliard, with two Park Plaza hotels in London, Owner Hotels in Hull and York, the Skelwith Group at Flaxby Country Club near Harrogate and the Four Pillars at Cotswold Water Park (see opposite).

Undecided jury

Yet the jury is still out on whether buy-to-let hotel rooms have proved themselves in this country. Certainly, no one has been shouting about how much money they have made.

Such high hopes for the success of buy-to-let come from the USA. There, condo-hotels are being opened in cities such as Las Vegas, Miami, San Diego and Chicago. A report by Smith Travel Research found there were nearly 250 condo-hotel projects under way across the USA, representing almost 10% of all hotel rooms in the works.

Whether that can be imported to UK cities is a different matter. Occupancy levels average 80% in London and an Office of National Statistics report showed visitor numbers to the capital in 2007 up to 26.2 million. There's also the 2012 Olympics in the offing. The capital seems well set. But outside London, choosing the right location for a buy-to-let scheme seems ever-more crucial.

GuestInvest has shelved plans to look at other UK and European locations for expansion, following a proposed £30.4m deal with Alias Hotels in 2005 that didn't fly. "We are focusing on getting our hotels up and running in London," Sandelson confirms. "While we are selling hotel rooms in London, it would be a brave man who buys them elsewhere."

Sustained occupancy

Cushman & Wakefield Hospitality director Philip Camble concurs. "It's not proven outside London. You need a market with sustained occupancy levels. Brighton might work, but I'm not convinced otherwise."

Owner Hotels chief executive and founder Andy Woodcock has a different view. He disregarded London in favour of Hull, which he describes as the "busiest UK port with a shortage of four-star hotels". His hotel has been open for just five weeks and already the property has 60% occupancy. There are four buyers on a waiting list for resales in Hull and six in York. He's guaranteeing investors a 10% return on investment in the first two years (see page 31). "If we get the same occupancy as the nearby three-star Holiday Inn then we could give our investors a 24% return on investment", Woodcock bullishly predicts.

For the model to work, it seems, hotels need to be in cities or resorts to generate business. But there are other obstacles in the way of those setting up in the market. As Stuart Harrison, principal at the Profitable Hotel Company, warns, buy-to-let is a complex area. "Fundamental issues need addressing, such as the ownership of the hotel, the leasehold and the management structure," he says. "Who will be the operator? What the brand will be? Does it have global reach? Does it fit the location? What is the reservations system? What is the return on investment? Is income generated from a room-only or from collective room type? Plus, if the developer doesn't sell all the rooms, there's a danger that it will book its own rooms first."

Developer Galliard Homes, which has embraced the buy-to-let hotel room scheme in the capital (see panel) has kept some hotel rooms in its portfolio at the 398-bedroom Park Plaza County Hall London. "Some of the deals fell through," explains Galliard sales director David Galman, but he points out that it's in the company's interest to make the hotel work to pay investors the guaranteed 6% without dipping into its own funds. And with 75% occupancy and an average room rate of £125 instead of the budgeted £100, he expects it to pay for itself.

As for the investors, there are risks that may prevent them from entering the market and most are untested in the UK. For example, the management of the hotel could change hands, which leads to uncertainty. Plus hotels need more investment in, say, refurbishment than other types of property.

Many sceptics may ask: "What happens if the purchaser can't find a buyer for the room?" And rightly so, as this could cause tension between owners, hoteliers and developers and discredit the model. "We don't have a comparison to show resales and I imagine investors will want to keep them for the guaranteed return-on-investment period," Galman says.

Flexible

However, Sandelson insists that things are more flexible in reality. He says that a third of the owners at his smaller, 20-bedroom Guesthouse West have sold their rooms, having made an average of 8% a year capital appreciation on their investment. And a third of those have gone on to buy rooms at the new hotels.

Sandelson adds that a number of mortgages at GuestInvest have been approved on rooms. The scheme also qualifies for business asset taper relief, which reduces capital gains tax by up to 10% for higher-rate tax-payers after two years. And investors can put it into a self-invested personal pension plan, keeping income tax-free.

All this should encourage investors, but Sandelson recognises they are a demanding lot. "It's important that our hotels provide good returns and rates are steady," he says.

But it's a difficult time to be considering the model, as Cushman & Wakefield Hospitality's Camble insists. "The big issue is how hotels ride out the downturn. Occupancy levels could drop to 70%. How will they survive - especially those who are giving away 50% of their room rate?"

Buy-to-let operators in the UK

ApartHotel/Park Plaza

Park Plaza will soon operate a similar number of rooms to GuestInvest - and possibly more - under the buy-to-let business model. Park Plaza Westminster Bridge, a 1,021-bedroom hotel is scheduled for completion in 2010. Developer Galliard Homes is selling ApartHotel rooms from £200,000, with each one featuring a kitchenette, seating area and bedroom. Returns will vary depending on the room type but investors get a 999-year lease and a guaranteed 6% net income return on all deposits made before completion, then a 6% net guaranteed return on the purchase price until 2015. The recently opened 398-bedroom Park Plaza County Hall London is also part of a buy-to-let scheme, with the price of ApartHotel suites starting at £200,000 each.

http://www.ownerhotel.com" target="_blank" rel="noreferrer">Owner Hotel

This north-east company has sold all the rooms in its two four-star hotels in Hull and York. The rooms were offered at between £70,000 and £170,000, which founder Andy Woodcock believes he could now sell at double the price. The company is offering 36 rooms in its pod concept in Hull starting at £56,250. Investors get 50% of the room takings each month and are guaranteed a 10% annual return in the first two years, plus 52 nights a year in the hotel.

http://www.skelwithgroup.com" target="_blank" rel="noreferrer">Skelwith Group

Although experts are sceptical about launching a buy-to-let scheme outside a big city, developer Skelwith Group plans to sell rooms at its £100m, 300-bedroom Flaxby Country Club and hotel near Knaresborough, North Yorkshire. Prices at the luxury hotel - which will have four helipads - will start at £90,000, with guaranteed returns of 7.5% for eight years. The development is scheduled to open in 2011.

Designs on new customers

Buy-to-let concept GuestInvest is ready to rock and roll - literally. With the launch of its Guest Hotels properties it aims to bring the London arts scene to customers. Rather than send his fashionable guests to sample the London arts scene, Guest Hotels founder Johnny Sandelson plans to entertain them with "cultural canapés" at the hotel. In other words, he wants to use his hotels for half-hour performances and readings - or whatever's hot on the arts scene.

He will also be wangling invites for his guests to the sort of private viewings, behind-the-scenes tours and indie gigs that the average tourist never gets to hear about.

It's all part of his Concierge Club initiative. This is an arts club with clout. Sleeping partners include the V&A, Architecture Foundation and the Institute of Contemporary Arts. As the target clientele work in the arts, fashion, film and media industries, such folk can't be fobbed off with mainstream stuff, so Sandelson's remit includes winkling out emerging talent. "The idea is to give tourists a connection to contemporary cultural London," he says.

Why go to so much trouble? Mainly because with the opening of his three new hotels Sandelson is expecting to have a pack of investors on his back demanding good returns on their buy-to-let deals. "We want to capture creative people. We will provide fewer services, but there will be more spirit," he says.

The Concierge Club is part of the strategy to create a chic, contemporary set of hotels with good returns, occupancy and repeat business. It also aims to fill those challenging Sunday nights and generate loyalty among locals or non-guests, who can become members for £240 a year.

Sandelson has done his homework. Before finalising the concept, he satisfied himself that 70% of tourists seek out a cultural event in the capital. "We have to work harder because we want to give investors good customer levels. It's about delivering a return on investment, so we're pegging the hotel concept on more than just providing luxury items," he says.

His plans are supported by an impressive management line-up, including former Savoy Group chief executive Geraldine McKenna as non-executive director curator Iram Quaraishi, previously head of creative networks at the ICA head of hotels Caroline King, who previously ran members' club Home House and was general manager at the Milestone Hotel, London and style director Stephen Bayley, who founded London's Design Museum and is architecture and design correspondent at the Observer.

Your chance to enter the 2008 Hotel Cateys

Time is running out to enter this year's Hotel Cateys, our exciting new awards, launched last year, that recognise the top performers in the UK's hotel industry.

Last year the entries flooded in, and more than 700 hoteliers attended a gala dinner at which those who create the perfect guest experience were rewarded.

Now we are looking for nominations for the second Hotel Cateys. Do you have a housekeeping team that really delivers? Does your conference and banqueting team offer an outstanding level of service? Or does your front-of-house team consistently provide more for your guests? If so, we want to hear about them.

This year we are incorporating the announcement of the Hotelier of the Year into the Hotel Catey awards.

Visit http://www.hotelcateys.com or e-mail cathy.fuller@rbi.co.uk for details on how to enter. The closing date for entries is 25 June.

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