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Are hotels and managed services a good investment?

By Greg Bell

The hotel and serviced apartment industry accounts for a sizeable chunk of commercial property holdings in Australia and beyond. The sector saw nearly 6% growth in overall revenue, per a study by IBIS World, between 2012 and 2017. Clearly, opportunity abounds. But what are some of the risks investors should be aware of when considering these sorts of properties?

Longer lease terms
The amenities, furnishings and low-maintenance elements that make hotel investments attractive can be offset by demand for greater upfront commitment, Finder notes. The idea is that in return for limited management responsibility – a hotel runs itself, in theory – more buy-in is required. If the investment model serves to use the property purely as an investment, never a personal residence, making more of an equity stake may not be an issue.

But as with any commercial investment, ensuring the duration of the lease is conducive to one’s broader budget and portfolio is essential. Just because less of a hands-on approach may be required from the owner, that doesn’t mean stepping away from the investment is simple – or even necessarily an option.

Management dependence
The other side of the low-maintenance coin is that, in order to have an efficient, functional and profitable hotel, there need to be sound systems and reliable management in place. Investors who take more of an immersive approach may not be attracted to these sorts of properties to begin with, but anyone who delves into this sector is forced to delegate to some degree.

A poorly managed property will ebb and flow with greater volatility as the tourism season waxes and wanes. And more damagingly, customer loyalty and reputation could suffer if management fails to consistently meet the expectations of the investment.

Capital gains
It’s a common practice to make commercial investments according to expectations for how they will be taxed for capital gains. While hotels and managed properties generally offer good short-term returns by way of guaranteed income and natural demand flow, capital growth can be comparatively modest.

However, that relative limitation can help investors because they don’t compete with the same level of demand. Fundamentally, it’s important to have a full understanding of and realistic expectations for the long-term and resale value of these properties before entering into an agreement.

For more information on hotels and managed properties, consult the experts at Ray White Surfers Paradise.

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