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Is buy-to-let the way forward for hotels?

20 October 2005
Is buy-to-let the way forward for hotels?

Buy-to-let hotel rooms are a new source of funding for hotel developers in the UK. Although they've been established for years in North America, only now is the potential being recognised this side of the Atlantic.

This week, Galliard Homes and Frogmore Property Company formally launch their second project, a 930-room hotel with conferencing for more than 1,000 delegates at the southern end of Westminster Bridge in central London, across the Thames from the Houses of Parliament. The Westminster Bridge Park Plaza will open in 2010, two years after the pair's first hotel project, the 395-room County Hall Park Plaza, opposite London's Waterloo station.

These two new hotels, while significant in their own right, matter more because of how they're being funded. Rather than the developers finding a single owner per property, each individual room is being sold on a 999-year lease. Rooms at the latest project are available to buy from 175,000, and a 6% return is guaranteed until 2015.

Galliard and Frogmore are not alone. GuestInvest was arguably the pioneer of the concept of buy-to-let hotel rooms in Britain, with a
20-room property in Notting Hill, west London. When GuestInvest began selling rooms at Guesthouse West hotel in spring last year, the 235,000-a-go investments sold out within a couple of months. Johnny Sandleson, the property developer behind the scheme, was confident enough to guarantee buyers a return of 5% on the cash they put in.

The guarantee could be met if the rooms were occupied 75% of the time. In the end, 90% occupancy has been achieved with an average rate of nearly 130. This meant the yield was 6.5% for the first year of trading. Buyers obtain a 999-year lease and receive 50% of the room's income. The owners can even stay in the room themselves for up to 52 nights a year at just 10.

Philip Johnston, head of the leisure and hotels team at property specialist Savills, the company that has acted for both Galliard and GuestInvest, said the investment case for buy-to-let hotel schemes was reinforced when some investors managed to sell on the rooms to others. "Now resales have occurred, the concept is beginning to be accepted here in London," he added.

But outside London it's been tougher going. GuestInvest agreed to buy the four-strong Alias Hotels chain from Luxury Hotel Management a year ago for 30.4m. But lack of demand meant the deal didn't proceed, and last month Alias was put back on to the open market.

GuestInvest has since announced plans to develop another London hotel, which is 10 times bigger than its first with 200 rooms. The new project is costing 35m and is being funded with equity from two property entrepreneurs, Vincent Tchenguiz and Guy Dellal.
In the USA, the buy-to-let idea is usually known as condo hotels. The term is somewhat confusing because it also encompasses developments which are not buy-to-let as understood in the UK.

Rob White, from US-based consultancy Middlesex Advisory, said there were two main types of condo hotel. The first is where residential apartments are built alongside a hotel. The flats are separate to the hotel, usually on different floors, but may have access to the hotel's amenities. Each flat is owned and occupied by the buyer, or let out directly by the buyer.

The second type is where the hotel rooms are owned by individual investors with the rooms being pooled and managed by a hotel operator - the buy-to-let model.

"Condo hotels have successfully driven hotel development in the USA because they appeal to the economic motives of all parties involved," said White.

Finding funding to build new upscale hotels has been almost impossible, and for developers and hoteliers, condo hotels were a way to get things done. Buyers have been attracted by the opportunity of owning their own hotel room or apartment.

But there are risks, warns White, particularly around how the hotel is designed and the legal complexities of ownership. The developer, for example, stands to maximise his interest if the level of public space is kept to a minimum. For apartment owners, however, some level of public amenity is crucial to the success of the hotel.

The biggest concern is about secondary sales, where the original buyer wants to sell on the hotel room. If this becomes difficult, which is likely if the residential property market slows or the hotel market falters, tensions will undoubtedly rise between owners, hoteliers and developers.

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