Investor Motivations to Build Hotels

Rarely is there a singular purpose behind the desire to develop or invest in a hotel; commercial motivations more often drive successful developments. They may also be combined or facilitated by secondary non-profit aims. All the parties involved in the hotel development must understand and align their motives. The critical motivations for a developer or investor typically are: 

Identification of a Market Opportunity

The catalyst for the majority of hotel developments is identifying a clear need for accommodations in a new market or a niche opportunity in a developed market. The developer may have specific development knowledge and a technical understanding of or access to land, construction resources, or finance in the geographic market. The hotel opportunity has the potential for medium—and long-term profitability. Hotels can generate high revenues due to their ability to adjust room rates dynamically and capitalise on multiple income streams. Investors are attracted to the potential for higher yields than other real estate types, especially in well-performing markets. Prime locations or destination markets offer significant potential for asset value appreciation over time. Hotels, especially branded properties, often fetch high valuations on resale due to strong operating performance.

Diversification of Portfolio

Large-scale developers with a specific geographic concentration and prior focus on other forms of CRE within a region may decide to spread market risk and diversify into the hotel sector. Hotels offer a different cyclical investment and have a low correlation to other CRE sectors. They can balance investment performance and, while carrying higher risk, can also give premium returns. Hotels provide a distinct income stream not directly tied to residential or office real estate cycles. Hotels diversify risk by drawing demand from multiple guest segments (e.g., leisure, business, and events), reducing dependence on a single market. Hotels in emerging tourism markets or destinations allow investors to hedge against economic risks in home markets.

Multi-Use Developments

A single development, building or site may be so significant as to warrant diversifying real estate sectors. A hotel may (i) enhance the attractiveness of the other CRE sectors within a multi-use development, (ii) be a brand marker for the quality of the construction, (iii) create superior quality infrastructure, (iv) create 24-hour security and facilities management, (v) be a food and leisure provider, (vi) deliver additional services, for example, laundry, concierge and transport, and (vii) increase value or reduce costs for other sectors of a mixed-use development. Hotels can anchor mixed-use developments or more extensive real estate portfolios, increasing the value of adjacent properties (e.g., retail or residential).

Infrastructure Development

Developing a new hotel (or a specific hotel sector), particularly a branded property, can significantly enhance the infrastructure of a location, city or region. Hotels have a high profile, and their availability can induce business to a site, change travel patterns and facilitate increased demand for other companies and facilities in the area. Large conglomerates may invest in hotels as part of broader efforts to develop a destination, such as resorts or tourism zones. Investors often target markets with rising inbound tourism and business travel trends to secure a long-term foothold. Building hotels in developing markets or new tourist destinations allows investors to establish early dominance before the market becomes saturated. Some governments offer tax breaks, grants, or subsidies for hotel development to boost infrastructure and tourism.

Limited Alternate Options

An existing building or development plot may have narrow alternate uses, either because the market in other types of CRE is saturated, the current structure does not lend itself to an alternate use, or there are usage restrictions by authorities that the site has the specific purpose of a hotel.

Certain parcels of land may not be suitable for other real estate developments due to zoning restrictions, such as land zoned only for commercial or tourism purposes. Location constraints include land in remote areas, near airports, or in tourist zones that lack residential or retail demand, as well as site-specific limitations such as irregular shapes, small parcels, or environmental restrictions.

Business Promotion or Ego

A corporation or high-net-worth individual may wish to showcase themselves with a high-profile asset such as a luxury or upscale hotel. Where external market demand is not immediately apparent, such a project will likely have motivation derived from infrastructure to satisfy corporate employee and client needs; however, aligning a commercial management structure can be complicated. 

Some investors build hotels as long-term legacy assets to contribute to their community or region (e.g., iconic or cultural landmarks). High-profile hotels give investors visibility, prestige, and access to elite social networks. Some investors are personally drawn to the hospitality industry and enjoy building or operating unique, guest-focused properties. Corporations may build hotels in key markets to serve their own travel and meeting needs while also monetising external demand.

Specialist Hotel Investors

Specialist hotel investors are typically focused on geographical regions and specific hotel sectors. They leverage their experience in acquisition, deal structuring, asset management and strategy, and internal structure or external relationships for property management. Such investors do not exist for all regions and tend to be rare in emerging markets; they are also inclined to focus on existing property or project acquisitions rather than initiating new hotel developments.

Brand Expansion

With most large hotel groups being asset-light, they would rarely initiate development themselves. Where they have identified a specific geographical opportunity to grow a brand, particularly a new brand, hotel groups may employ their investments for brand rollout or seek to partner with another partner with local knowledge and influence or specific skills, such as a building contractor, to develop several hotel properties. Partnering with a well-known hotel brand can enhance the property’s value, drive occupancy, and attract loyalty program members. Investors may build boutique or independent hotels to capitalise on the growing demand for unique, localised experiences. Investors may redevelop existing properties into higher-class hotels to improve asset performance and appeal to premium market segments.

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