One of the more intriguing aspects of the post COVID-19 hotel market is the rise of first-time buyers, particularly from high-net-worth and family-office capital. More than 10,000 single-family offices globally hold real estate assets in excess of $5 trillion, according to JLL, and investment by private capital has tripled since 2010. After investments in finance or industrial conglomerates, real estate ranks third as an asset class for private capital, according to Wealth -X’s Billionaire Census 2020 Report. Hotels represent a very significant portion of these investments, and high-wealth individuals are especially attractive to luxury hotels. Some investors are motivated by emotional factors such as the desire to own particular assets in a particular location, while others are based on strategic analyses with outside resources. Some are looking for opportunities which may arise due to the impact on hospitality from the COVID-19 pandemic.
While price is not always the dominant factor in making these investments, high-net-worth individuals and family offices are seeking investment returns. In some cases, they have a longer investment horizon, which provides greater flexibility in asset positioning, marketing and operational strategies to achieve maximum investment returns. While these investors may be very savvy in other industries, luxury hotels can present a unique and challenging opportunity as these assets are not simply a real estate investment but also an investment in an operating business. It is critical for first-time buyers of luxury hotels to surround themselves with a team of hospitality professionals to prepare a pathway for success and to provide guidance along the way.
Location, location, location
The old adage for real estate investments, in general, holds especially true for investments in luxury hotels. Resort properties and global gateway cities have traditionally been the destinations of choice for luxury hotel investments. For resort properties, a key factor to consider includes access, whether drive-to, via adequate airlift or other transportation means. For urban markets, the primary concern is to be certain the market can support the overall investment based on expected occupancies and average room rates. Some of the large brands have made the mistake of extending their brands into small or midsize markets, which cannot support the overall investment required to meet their brand standards. Location within a specific market should be evaluated in terms of key demand factors and access to attractions for both business and leisure travelers. Being on the beach vs. a block from the beach can make or break a resort property. Location of urban assets can be more nuanced based on the principal types of demand generators.
Market and competitive set analysis
For any luxury hotel investment, the first order of business is to prepare a market and competitive set analysis. This will involve examining types and total demand for the market, along with existing rooms inventory. An investor will want to be assured of achieving a fair share of the market based on occupancy, average room rate and RevPAR. In many cases, additional investment may be required to improve the overall quality of the property or to introduce new revenue generating facilities to compete more effectively with other properties in the market. All of these factors must be taken into account in assessing purchase price and investment returns.
Independent vs. brand
Early in the process, an investor should decide whether the asset will be positioned as an independent or a branded property and, if branded, which brand with which to affiliate. There are pros and cons to both approaches. Generally, a brand will provide greater customer awareness, worldwide distribution systems and brand loyalty programs, can more easily recruit staffing and provide in-house technical services and design support. These advantages, however, come with a price tag in the way of rigid design standards, higher operating costs and the encumbrance of long-term management, franchise or license agreements. The most desired brand may also be unavailable if it already has a property in the market or is restricted by radius clause constraints. On the other hand, independent hotels have no brand constraints on an owner’s ability to design and manage a property. Operating costs may be lower as there are no brand-related fees, and there is no encumbrance in the event of a sale of the property. Independent hotels may also have greater flexibility in market positioning and rate determination.
While high-net-worth individuals and family offices may have the financial resources to pay all cash for acquisitions and improvements, to optimize the investment and return on their equity investors may want to consider financing the acquisitions and capital improvements with some debt financing. The amount of debt should be determined on the property’s ability to meet all debt service requirements. This is usually calculated based on the principal loan amount, interest rate, coverage ratios required and the net cash flow generated by the property. As a result of the COVID-19 pandemic, many lenders have reduced their exposure to hospitality assets and have imposed more stringent underwriting criteria for new loan originations. The metrics most important to lenders in underwriting, sizing and pricing hotel loans are location and quality of asset. Other factors include the borrower’s experience and track record; liquidity and strength of the balance sheet; and source and mix of demand for the property. Given the uncertainty around the timing of a recovery in the hospitality industry, construction lending markets are the most constrained.
Personalize beyond belief. Bigger hotels and chains will never be able to do what can be done with personalization and customization, so leverage that as much as possible.
Be a lean, mean marketing machine. Spend your marketing dollars on the activities that drive ROI. Almost everything is measurable and every dollar is important, so setting goals and holding teams/vendors accountable is more important than ever. Give Google what it wants. Create your own content, focus on what makes you unique and your website will be a search engine delight. Use video. YouTube is the No. 2 search engine in the world. Video can be done on a smartphone, and tools like Biteable will make you an editing genius. Start writing. Blogs don’t have to be Pulitzer Prize winning as long as the message comes from the heart. Go digital and invest in automated technology to stay connected to your customers. Be an experiential destination and give people options for authentic experiences. Hotel owners should cultivate relationships with the owners of popular and/or unique business/attractions in the area to create packages for customers.
Some high-net-worth individuals and family offices may have the resources internally to fully evaluate and manage their hotel investments. In our experience, we find most non-institutional investors may need some additional resources in the acquisition and evaluation of hotel assets. Market positioning, marketing, distribution and oversight of day-to-day operations is not usually a core strength for them. We encourage hotel owners, and especially first-time owners, to assemble a highly professional team to provide the necessary resources. This is very critical both in the acquisition process, positioning or repositioning process and the marketing and operations of the hotel. A qualified advisory services firm and good asset manager can provide all these services and can guide the owner/investor to a great experience and successful investment.
By L.K. Eric Prevette