The Hospitality Industry Between Dream and Profitability

2. General Advantages of Investing in a Hotel

In the previous article, we made an inroad into the definition of hospitality and in particular the hotel sector. We will continue with some basic notions that underpin the decision to invest or not in a hotel.

Hotel investments are investments that balance financial risk because they combine the stability of a tangible real estate asset with the growth potential of a tourism business. Here is why a hotel can have an advantage over traditional financial investments or other businesses:

Constant income and stable turnover (cash flow): a hotel generates daily income from room reservations and related services, which can mean a constant cash flow. Unlike stocks, whose yield (dividends or appreciation) can be unpredictable from one quarter to the next, a well-managed hotel can provide regular income. This recurring income can bring greater financial stability than investments in startups or other new businesses, where the risk of failure and volatility of earnings are high.

Portfolio diversification and lower risk: Adding a hotel to an existing portfolio helps diversify beyond stocks and bonds, reducing exposure to fluctuations in financial markets. A hotel’s performance has little correlation with the stock market – for example, if the stock market falls, this does not necessarily mean that the number of tourists also falls. In addition, hotels benefit from both tourist demand and sometimes local demand, which can protect the investment in difficult economic times, compared to a traditional business that depends on a single sector.

Tangible asset with resale value: unlike an investment in bonds or stocks – which are financial papers – a hotel is backed by a physical asset: the building and the land. This provides a valuable collateral effect and a potential for appreciation over time of the real estate property. In times of inflation, the value of real estate tends to increase, so owning a hotel can act as a hedge against inflation and as a means of preserving wealth. In addition, if the hotel is in a good location, the property can be valued at sale in a similar or even superior way to other real estate. Here we are talking about an “exit” from the business that is all the greater the higher the hotel category. A 5-star hotel with a renowned brand has an existence multiplied by an important coefficient both rationally and emotionally. If the hotel is in the economy class, it will have a higher operating yield but a lower exit value. This is a “trade-off”, a decision-making balance that takes into account the time horizon and the investor’s budget.

Competitive return and growth potential: Hotel investments are often perceived as having a moderate to high degree of risk (because they involve complex operations), but as a result they can offer higher returns than fixed income instruments (bonds) or than renting an apartment. Many institutional investors and investment funds are attracted to hotels precisely because of the expectations of higher returns. A recent global survey shows that over half of hotel investors plan to buy more in this sector, based on expectations of higher profits compared to other investments. In addition, periods of economic recovery or tourism growth can significantly boost a hotel’s revenues, offering growth potential that is difficult to achieve with purely passive investments (such as mutual funds or bonds).

Control and professional involvement: When you buy shares in a large company, you have very little control over that company’s decisions. On the other hand, by investing in a hotel (either as a direct owner or as part of a group of investors), you can exercise some control or at least influence over how the asset is managed. You can hire a professional hotel management firm or choose a well-known hotel chain to operate the hotel under a well-known brand. This way, you achieve a balance between involvement and delegation: you benefit from the expertise of professionals, but you can also adapt your business strategy according to your objectives. In comparison, an investment in a startup often requires intense involvement, and one in a traditional business requires a lot of time and direct effort; a hotel investment can offer you the chance of a passive income (if you leave the operation to others) combined with the satisfaction of owning your own business.

Specific advantages over classic real estate investments (residential, offices, retail) Investment flexibility and risk reduction

Traditional real estate investments – rental apartments, office buildings or retail spaces – are well-known and have their own merits. However, hotels bring some distinct benefits in this comparison:

Multiple revenue streams: A major advantage of hotels is the diversification of revenue sources. In addition to room revenue (accommodation), a hotel can generate money from food and beverage, spa and wellness, events and conferences, parking, souvenir shops, integrated shopping malls, etc. This diversification means that if one of the lines slows down (for example, occupancy decreases in a certain season), the others can partially compensate. By contrast, a residential property usually only brings in monthly rent, and an office space has income predominantly from rental contracts. Hotel diversification can lead to increased total revenue and more efficient use of the property (every square meter can “work” for you – rooms at night, meeting rooms during the day, restaurant for both in-house and out-of-town guests).

Dynamic pricing and market adjustment: In the hotel industry, room prices can be adjusted daily based on demand, events, or the season. This dynamic pricing flexibility allows owners to take advantage of peak periods (for example, during the tourist season or during a major event in the city, rates can increase substantially, increasing profit margins). In contrast, in an office building or retail space, rents are fixed in long-term contracts and cannot be easily changed until the contract is renewed. Residential rents may adjust annually (based on inflation or the local market), but they cannot react from one week to the next. Thus, the hotel has the potential for higher long-term returns because it can immediately capture increases in market demand.

Optimizing occupancy: Although a hotel’s occupancy rate varies (it can be 60% one month and 80% the next), effective management can optimize this indicator through sales and marketing strategies. The important thing is that a hotel has a high occupancy rate if there is demand – rooms can be sold every day, unlike an apartment that, if left unrented, sits empty for a month or more without any income. A well-positioned hotel can achieve an average annual occupancy rate of, say, 70-80%, which means a continuous return on the asset. With residential properties, there is the risk of unoccupied spaces in between tenants, and with offices it can take months to find a new client for a vacant floor. Hotels minimize this “dead time” by demanding short-term demand and constantly attracting new clients.

Flexibility in use and adaptation: a hotel can be considered a form of flexible real estate. The interior spaces can be reconfigured relatively easily – if the market requires more conference rooms and fewer rooms, some accommodation floors can be transformed into event spaces or coworking offices, but there are also methods of converting a room without touching the architectural structure (retractable bed, removable furniture, etc.). If the destination has many young tourists, the hotel can add a socializing or entertainment area; if the demand for wellness increases, a modern SPA can be set up. In addition, the hotel concept can be changed through rebranding or redesign: a 3-star hostel can be transformed (here we are talking about “conversion”) into a 4-star boutique hotel through renovation and changing the target audience. In comparison, an apartment building has a fixed purpose (housing) and is more difficult to transform for another use without major investments, and a commercial space in a mall cannot become something else overnight. This adaptability makes the hotel investment more resilient to market changes – the hotel can change its “personality” with demand.

Market value driven by brand and position: In the hotel sector, being associated with a well-known chain (Marriott, Accor, IHG, Hyatt, Hilton, Aman, Peninsula, Mandarin Oriental, Rosewood, Jumeirah, etc.) or having excellent reviews can substantially increase the value of the property. A branded hotel in a central location becomes a prestigious asset, sometimes called a “trophy asset”, which maintains its value and attracts buyers if you want to sell. In contrast, an office space depends more on the local real estate market and the regional economy, and does not have the same international prestige factor. Hotels also benefit from tourism trends: if a city becomes more popular, hotels will be the first to feel the increase in demand, unlike the office segment, which does not directly benefit from the increase in tourist flow. These are just a few of the conclusions of the INVEST 2024 summit and in order to be able to delve into them further, we will continue the debates about hotel investments at the edition of November 19-20 this year (www.inv-est.eu).