By LK Eric PrÃ©vette
One of the most intriguing aspects of the post-COVID-19 hotel market is the rise of first-time buyers, particularly among high net worth and family offices. More than 10,000 single-family offices around the world hold real estate assets of more than $ 5,000 billion, according to JLL, and private equity investments have tripled since 2010. After investments in financial or industrial conglomerates, the real estate ranks third among asset classes for the private sector. capital, according to the Wealth -X Billionaire Census 2020 report. Hotels represent a very important part of these investments, and high net worth individuals are particularly attractive for luxury hotels. Some investors are motivated by emotional factors such as the desire to own particular assets in a particular location, while others rely on strategic analyzes with outside resources. Some are looking for opportunities that may arise due to the hospitality impact of the COVID-19 pandemic.
While price is not always the dominant factor in making these investments, high net worth individuals and family offices seek returns on their investment. In some cases, they have a longer investment horizon, which provides greater flexibility in asset positioning, marketing, and operational strategies to achieve maximum returns on investment. While these investors may be very savvy in other industries, luxury hotels can present a unique and exciting opportunity as these assets are not just a real estate investment, but also an investment in a running business. It is essential for first-time buyers of luxury hotels to surround themselves with a team of hospitality professionals to prepare the way for success and support them throughout the journey.
Location, location, location
The old adage for real estate investments in general is especially true for investments in luxury hotels. Resort properties and global gateway cities have traditionally been the prime destinations for luxury hotel investments. For resort properties, a key factor to consider includes access, whether by car, via an adequate airlift, or other means of transportation. For urban markets, the main concern is to ensure that the market can support the overall investment based on expected occupancy rates and average room rates. Some of the big brands have made the mistake of expanding their brands into small to medium sized markets, which cannot afford the overall investment required to meet their brand standards. Location within a specific market should be assessed in terms of key demand factors and access to attractions for both business and leisure travelers. Being on the beach versus one block from the beach can make or break a resort property. The location of urban assets can be more nuanced depending on the main types of demand generators.
Market and competition analysis
For any investment in luxury hotels, the first order of business is to prepare an analysis of the market and the competitive landscape. This will involve examining the types and total market demand, as well as the inventory of existing chambers. An investor will want to be assured of getting 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 income generating facilities to more effectively compete with other properties in the market. All of these factors should be taken into account in evaluating the purchase price and returns on investment.
Independent vs brand
At the start of the process, an investor must decide whether the asset will be positioned as independent or branded property and, if it is a brand, which brand to affiliate with. There are advantages and disadvantages to both approaches. Typically, a brand will offer greater customer awareness, global distribution systems and brand loyalty programs, be able to more easily recruit staff, and provide in-house technical services and design support. These benefits, however, come with a price tag in terms of rigid design standards, higher operating costs, and the clutter of long-term management, franchise or licensing agreements. The most wanted brand may also be unavailable if it already has 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 can be lower as there are no costs associated with the brand and there is no charge if the property is sold. Independent hotels can also benefit from greater flexibility in market positioning and pricing.
While high net worth individuals and family offices may have the financial resources to pay cash for acquisitions and improvements, to optimize the investment and return on their equity, investors may consider financing acquisitions and capital improvements. with debt financing. The amount of debt should be determined based on the property’s ability to meet all of the debt service requirements. This is usually calculated based on the principal amount of the loan, the interest rate, required coverage ratios and the net cash flow generated by the property. In the wake of the COVID-19 pandemic, many lenders have reduced their exposure to hotel assets and imposed more stringent underwriting criteria for new loan arrangements. The most important parameters for lenders in underwriting, sizing and pricing hotel loans are location and asset quality. Other factors include the borrower’s experience and track record; liquidity and strength of the balance sheet; and the source and composition of demand for the property. Given the uncertainty surrounding the timing of a recovery in the hospitality industry, construction loan markets are the most constrained.
Personalize beyond belief. Big hotels and chains will never be able to do what can be done with personalization and personalization, so take advantage of it as much as possible.
Be a lean, mean marketing machine. Spend your marketing dollars on the activities that generate the ROI. Almost everything is measurable and every dollar counts, so setting goals and holding teams / suppliers to account 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 treat for the search engines. Use the video. YouTube is the # 2 search engine in the world. Video can be shot on a smartphone, and tools like Biteable will make you an editing genius. Start writing. Blogs don’t necessarily have to win the Pulitzer Prize 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 maintain relationships with owners of popular and / or unique businesses / attractions in the area in order to create packages for guests.
Some high net worth individuals and family offices may have the internal resources to fully assess and manage their hotel investments. From our experience, we find that most non-institutional investors may need additional resources for the acquisition and valuation of hotel assets. Market positioning, marketing, distribution and oversight of day-to-day operations is usually not a core strength for them. We encourage hotel owners, and especially new owners, to build a highly professional team to provide the necessary resources. This is very critical both in the process of acquisition, positioning or repositioning and in the marketing and operations of the hotel. A qualified consulting firm and a good asset manager can provide all of these services and can guide the owner / investor to great experience and a successful investment.
LK Eric Prevette is Managing Director of Luxury Hotel Advisors (LHA), a luxury hotel consulting and acquisition company. With extensive experience in the luxury hospitality industry, he has successfully repositioned and assisted in the sale of numerous hotel properties valued at over $ 500 million, and provided valuable management services. of asset and other advisory services to owners and lenders of more than 50 luxury hotels in the United States, Europe, Mexico, Caribbean and Asia.