The Advantages of Hotel Investment - Hotel Development Guide

While the difference from other commercial real estate sectors in structure and cycle raises challenges, it also has advantages and creates opportunities. Under the right circumstances, hotels can be lucrative as stand-alone investments or part of a strategic CRE portfolio. Hotel investment advantages stem from hotels’ operational nature and income-generation potential. Some key considerations are listed below:

The Advantages of Hotel Investment – Table of Contents

Dynamic Pricing

Hotel room rates can rapidly adjust for demand, inflation, foreign exchange rates, and other macro changes compared to office and retail rates. Hotels operate on dynamic pricing models, allowing rates to fluctuate based on demand (e.g., seasonality, events, or occupancy). This can significantly boost revenue in peak periods. Hotel rooms are essentially leased on a daily or short-term basis, allowing owners to adjust pricing quickly based on market conditions and maximise returns. Other CRE properties are often locked in for several years on fixed long-term leases, limiting their ability to capitalise on short-term market upswings.

Inflation Hedge

Hotels are better positioned to combat inflation since room rates are frequently adjusted to keep pace with rising costs. Long-term lease agreements in other asset classes might prevent property owners from immediately adjusting rents to account for inflation.

Diversified Income Streams

Hotels generate revenue from multiple sources beyond room bookings, such as food and beverage, conferences and events, spa and wellness services, and ancillary services (parking, gift shops, etc.). Office buildings and warehouses primarily generate income from leases, with little opportunity for additional revenue streams.

Economic and Tourism Growth

Hotels benefit directly from tourism, business travel, and global mobility growth. Demand can increase rapidly in emerging markets or destinations, driving high returns. Growing consumer demand for unique travel experiences (e.g., boutique hotels and wellness retreats) creates opportunities for niche or experiential properties that command higher rates. Office and retail spaces depend more on local or regional economies, making them less influenced by global travel trends.

Adding Value Through Branding

Partnering with established hotel brands can enhance the property’s value and occupancy rates. Brands often have loyal customer bases and robust marketing platforms. Office or retail properties rarely benefit from direct brand partnerships to drive demand.

Counter-Cyclicality & Portfolio Diversification

Hotels offer a different cyclical investment, a low correlation to other CRE sectors and are more stable and often counter-cyclical to stocks and bonds. Hotels provide diversification in a CRE portfolio due to their distinct demand drivers. Additionally, hotel-backed REITs offer higher liquidity for investors. Office or industrial portfolios often depend on regional economic factors, lacking diversification tied to global travel.

Broad Source Market

Unlike other CRE, hotels derive demand from household (tourism) and business (commerce) sources, potentially countering seasonal demand. Hotels draw demand from multiple guest segments, such as business travellers, conferences, corporate events, or regular work travel; leisure travellers with tourists, staycations, and adventure seekers; groups and events, including weddings, conventions, and family reunions; medical tourists, educational groups, or long-stay corporate clients. Hotels can target a broad range of geographic source markets, protecting against economic issues in client source countries. This diversity enables hotels to hedge against downturns in any one segment.

Client Diversity

Hotels do not typically rely on a single tenant or corporation and are less prone to sudden changes in tenants’ status and bad debt. Unlike other commercial real estate, hotels cater to a large, diverse group of short-term clients. A hotel hosts many guests annually, spreading risk across a wide customer base. Even if a few guests cancel or a specific client group reduces travel, the overall impact is minimal compared to losing a single tenant in an office or retail space.

Consistent Income

Hotel CRE provides ongoing income and competitive investment returns. While hotels rely on short-term guests, consistent demand drivers like business travel, leisure tourism, and local events can dovetail between weekdays-weekends and seasons, creating a steady revenue stream over time.

Longevity & Capital Appreciation

Well-conceived and well-maintained hotel assets retain worth and can develop character, reputation, and value, whereas offices can be categorised into lower-class grades or have a limited lifetime. Hotels in prime locations often see significant capital appreciation due to land value increases and demand for tourism infrastructure.

Tax Incentives

In emerging markets, government incentives often exist to improve the infrastructure and develop international-quality hotels. Hotel Owners often benefit from tax incentives such as accelerated depreciation on fixtures and furnishings or credits tied to tourism development. While tax benefits are available for other classes, hotels’ operational nature often provides more depreciation opportunities.