Advice and Opinion

How to make sound hotel suite investments

With business tourism in SA growing and the demand for flexible corporate accommodation also increasing, sectional title hotel suites are once again attracting the attention of property investors.

“The decline in the rand exchange rate over the past few years has boosted SA’s popularity as an international venue for conferences, events and business meetings,” says the Rawson Property Group’s Managing Director, Tony Clarke.

“Not only do we have great meeting and events venues, but lower costs for those paying in dollars, euros or pounds mean that delegates can combine their conference attendance with some holiday time and stay for a few extra days”.

“In addition, there is a global trend now among mobile executives and professionals who work on contract or relatively short-term assignments to opt for hotel suites rather than self-catering apartments wherever they are working. It’s more convenient to have everything handy, from meals and catering when they need it, to business services and meeting rooms on site.

He says this additional demand from the business sector is one of the main reasons that SA hotel occupancies are on the rise and are, according to the PricewaterhouseCoopers (PwC) Hospitality Outlook report for 2015 to 2019, expected to reach levels of around 80% at the upper end of the market by 2019.

“The report also says that room revenue in SA is expected to expand at an 8% compound annual rate over the next three years and that total room revenue is forecast to reach R27,7 billion in 2019. So this is a huge and growing market and property investors are once again looking at hotel suite purchases as a way to share in the profits.”

Sectional title ownership of hotel rooms or suites is of course not a new concept in SA, with several well-known properties having successfully been opened up to private ownership in this way. These include the Pepper Club and the Cape Royale developments in Cape Town, the Harbour Island Hotel in Gordon’s Bay, the Riverside Hotel in Durban, the Fairmont Resort in Zimbali, the Goedemoed Wine Resort and Spa in Paarl, the Parktonian in Johannesburg and the King George Hotel in George.

“And many owners have found these purchases to be an excellent alternative to traditional buy-to-let apartments,” says Clarke. “For one thing, if they choose a resort or hotel that is professionally managed, they don’t have to deal with the usual complexities and challenges of letting their investment unit, any non-payment of rent, any maintenance and repairs, or any trustee and body corporate issues”.

“Privately owned suites are generally put into a rental pool and let on a rotational basis in order to even out occupancies and the level of wear-and-tear on the furniture, fixtures and fittings.”

Other advantages, he says, include the security of actually having title to your hotel room or suite (unlike timeshare) and the freedom to resell it as and when you wish, a monthly return on the investment that is usually also sufficient to cover the sectional title levies, capital growth and access to “free” holiday accommodation in your upmarket venue or a similar venue elsewhere in the world for one or two months each year.

“In short, sectional title hotel suites can be a very good option for investors looking to diversify their property portfolios. As always, however, the key to success is top quality management, and transparency when it comes to finances and rental earnings.”

Consequently, Clarke says, investors keen on this type of purchase should look out for properties that not only have a track record of high room occupancy rates but also have a professional and experienced hotel management team in place, and also offer them a say in the running of the “common property” as well as their units via an established structure such as a rental pool management committee.

“As with all investments, there needs to be oversight of the annual expenditure budget and the ongoing rental operation to ensure that quality is maintained and returns are maximised. Generally, what they should be looking for is a split of the pooled revenue generated by all investment units after the deduction of pooled monthly operating expenses including management fees and a refurbishment reserve.”

“To make things even more attractive for investors, some resorts have also been known to offer suite owners a percentage of the total revenue generated from all room sales, and there is a growing trend in such properties for investors also to share in the food and beverage revenues generated right across the resort.”