FAQs

The following are a series of general questions and answers regarding hotel room investments as an asset class. Some answers will vary according to the particular hotel room investment you are considering and you should check these with ourselves prior to investment.

1. What are hotel room investments?

Hotel rooms or aparthotel rooms are a hotel based buy-to-let property that allows you to buy a long Leasehold of a hotel room, registered at the Land Registry. This is similar to purchasing a buy to let flat except that you simultaneously sign a room rental agreement with a hotel operator to fully manage the letting of the room on your behalf for the long-term via a leaseback arrangement. The hotel room may consist of just a bedroom and bathroom, but may also include a kitchen and in some cases may be similar to a traditional apartment.

Some hotel room investments have more than one bedroom in the suite. Revenue is shared with a hotel operator on a predetermined basis. Some hotel room investments permit private use for part of the year as an option but this option is not available if the hotel room is purchased by your pension (SIPP/ SSAS) for tax reasons. Hotel room investments typically offer a higher yield (percentage of the property price represented by the income)/income than traditional buy to let property as well as the opportunity to profit from capital growth.

The aims of hotel room investments are :

• to generate yields/incomes that can be much higher than on normal residential buy-to-let property investment
• to deliver an increase in the capital value over the term of ownership
• to share in the profitability of the buoyant hotel sector at a price level not available when purchasing whole hotels

2. How do hotel room investments compare to traditional buy-to-let?

Hotel room investments typically offer a higher yield/income than traditional buy to let property as well as the opportunity to profit from capital growth. They also usually come with mandatory management agreements and leases so that the hotel operator has certainty of managing all of the rooms in the hotel. Unlike a buy to let letting agent taking just 10% or so of the rental income, a hotel operator has many more costs and services to provide each day and typically takes around half of the actual room income achieved but this is countered by the much higher gross yield of a hotel room due to the intensive nature of the letting of a hotel.

The hotel room is fully managed and marketed on your behalf by a highly motivated operator sharing in a significant proportion of the room income. An experienced hotel operator will manage the day to day running of the hotel or resort.

3. What type of yields/income can I expect?

Hotel room investments typically generate 6% to 10% or more net yield. This compares to buy to let net yields being around 3.5% after letting agent costs, voids, repairs or service charges etc.

Even the gross yield of buy to let property is usually no more than around 5.5% before any costs are deducted meaning that hotel room investments can be significantly more profitable. This level of yield can repay mortgage debt very quickly compared to residential buy to let property leaving the property debt free and therefore providing the investor with the entire net yield as income in the future.

4. Is this a commercial or residential property purchase?

Hotel room investments are usually classed as commercial properties and for this reason UK based schemes (and some overseas ones) often have VAT charged on them although most schemes arrange for the VAT to be reclaimed on your behalf with minimal paperwork and often no cost.

Ongoing rents usually have VAT applicable and again most hotel room investments come with a VAT accounting service at low or negligible cost. Do not worry if you have not handled VAT in the past as the accounting service will handle the paperwork and your behalf. Sales prices of hotel rooms are normally quoted exclusive of VAT due to it being reclaimable. In the same way, rental incomes and yields are normally quoted exclusive of VAT but we have seen one or two schemes advertised in a misleading way and 12% gross income including VAT is actually nearer to 10% once the VAT is paid over to HMRC.

5. Who manages my hotel room on my behalf?

When your lease is granted to you, you will simultaneously sign a management agreement with the hotel operator. The hotel operator will deal with all the day-to-day running of the hotel on behalf of all of the hotel room owners. Hotel operators may be part of a brand networks such as Hilton, Raddison, easyHotel, Intercontinental etc. or may be a franchisee for one of these brands which is very common.

6. How do I generate income?

Your apartment is managed and marketed by a hotel management company who will promote the room on your behalf - there should be no work required by yourself on marketing/ lettings whatsoever. Investors receive a share of the gross revenue generated by the room based upon the exact amount it actually rents for each night. You will receive a percentage of the room revenue (after deduction of any third party sales and credit card commissions in most schemes). At the end of each quarter, the hotel operator will produce a set of accounts to you outlining the monies received by it for the supply of your room as a hotel room during that quarter.

Some hotel room investments have the rental income pooled for one type of room and it is distributed equally between each of the investors rather than the investor receiving just the rental proportion belonging to their own room lettings. This is often thought to be much fairer and further reduces the risk of owning a single room. In other quality hotel room investments, if the income is not pooled then rooms are rotated automatically by the booking system to ensure fairness of income distribution in an alternative fashion.

7. Do I receive a share of food and beverage income?

Most hotel room investments only share the room rental income not the food and beverage income as well and this profit is retained by the hotel operator and is part of their business model in being able to offer a significant percentage of the room income to the investor.

8. Do I receive management statements?

Yes. You will receive a quarterly management statement.

9. What other costs are payable by the investor?

This can vary slightly by scheme but generally speaking the share of room income that the investor receives is normally the net yield/income after near enough all costs. The exceptions can be a ground rent of typically £100 to £250 per annum for many hotel room schemes, and some schemes have a sinking fund for major works (rather than day-to-day maintenance that is paid for by the hotel operator) and this is paid for by the investor out of net income but as this can typically be around 2.5% of the gross room income it does not affect the investors income significantly.

Many hotel room investments limit this sinking fund for major works to a fixed amount for several years and an investor will only participate in a share of major works in the future if this exceeded the sinking fund set aside for such purposes. This type of arrangement is very similar to apartment service charges that also apportion building costs of this type between the leaseholders. If the investor is taking advantage of the ongoing VAT service and is not using their current accountant then a typical cost of £250 per annum may apply.

10. Who will re-sell the hotel suite if I wish to exit?

Assetz offer a resale service use their existing marketing network and database of investors. Alternatively you usually have the right to sell privately through any agent or directly yourself. Some hotel room investments have a clause in the lease that controls the resale or provides a right to a sales commission by the original vendor.

12. Will I have to pay for electricity and other utilities?

No, the hotel operator will pay for these costs at its own expense out of its own proportion of the hotel room income.

13. What about insurance charges?

The hotel operator will insure the hotel at its own expense out of its own proportion of the hotel room income.

13. Will I have to repair and decorate the room?

In almost all hotel room schemes the hotel operator will at its own expense be responsible for cleaning, laundry, repair, maintenance, decoration and housekeeping of the room and will supply, maintain and repair (and when required replace and renew) all the furniture in your room.

14.Is personal usage allowed and how long can I take?

You can usually take up to a maximum of 56 days a year Please note that for SIPP purchasers personal usage is not permitted. If personal use of a hotel room is part of your decision to invest then please check that the particular hotel room that you are purchasing is on a scheme that permits personal use.

15. Will I have to pay for my room if i wish to have personal use ?

No, when using your room it is free of charge in most schemes although on some schemes there are cleaning and changeover costs. Once you have used up your personal allowance you will be able to stay at the hotel as a guest subject to going market rates.

16. Will I be able to terminate the management agreement with the hotel operator if they do not perform?

This is dealt with in the licence for the specific hotel and it is usual for this to be the case where a specific breach of performance in the licence by the operator can permit the hotel room investors to change the operator according to voting levels. Please see the licence for the specific hotel room investment you are considering.

17. If I purchase a hotel room with personal use attached can anyone use it ?

Usually you can give the benefit of the free hotel room use to anyone you know but you would normally need to book this yourself on their behalf.

Questions

1. What are hotel room investments?

2. How do hotel room investments compare to traditional buy-to-let?

3. What type of yields/income can I expect?

4. Is this a commercial or residential property purchase?

5. Who manages my hotel room on my behalf?

6. How do I generate income?

7. Do I receive a share of food and beverage income?

8. Do I receive management statements?

9. What other costs are payable by the investor?

10. Who will re-sell the hotel suite if I wish to exit?

11. Will I have to pay for electricity and other utilities?

12. What about insurance charges?

13. Will I have to repair and decorate the room?

14. Is personal usage allowed and how long can I take?

15. Will I have to pay for my room if i wish to have personal use ?

16. Will I be able to terminate the management agreement with the hotel operator if they do not perform?

17. If I purchase a hotel room with personal use attached can anyone use it ?