Commercial property has recovered strongly since 2008, but the effects of the liquidity crisis linger in places. This leaves interesting opportunities for the shrewd investor.
This leaves interesting opportunities for the shrewd investor.
The IPD UK Quarterly Property index shows annualised returns of 11.7 per cent for all commercial property in the past five years and 16.4 per cent over the past 12 months (up to the end of September 2014). This comes from a combination of yield and growth.
Defensive-minded investors – perhaps anxious that such returns are not sustainable and therefore seeking out pockets of value – might do well to investigate the provincial hotel sector. Here there are still some legacy opportunities from the 2008 crash.
Prior to 2008, when banks were lending to all and sundry, many developers were tempted to build hotels – even though they knew little about how to manage them successfully.
These properties were hit twice by the downturn. With capital to fund transactions drying up, valuations plummeted everywhere and loan-to-value ratios on heavily geared deals turned ugly.
The downturn also had a profound effect on real returns. Local public sector demand disappeared quickly, and the owners did not have the skills or experience to replace it.
In the wake of the crash many banks, unwilling to unwind catastrophic positions, initially conducted an ‘extend and pretend’ policy – hoping that if they held on long enough the market recovery would kick in, rescuing them.
By 2011 they were being forced to crystallise their positions, and that is still happening.
Flight to value
In the past 18 months the sector has seen a number of hotels built in 2007-2008 come on the market for less than they cost to construct. These are the kind of smart, low-budget hotels many of us choose for city breaks, business trips or travel stopovers.
They are the Lidl and Aldi of the hotel market, which has seen the same flight to value experienced in the supermarket sector.
Not only is there an opportunity to buy these hotels at a good price, there is also the potential to bring in management teams that know what they are doing to enhance profitability. This is not a sector for the amateur.
The obvious starting point is tackling costs. The Holiday Inn Express model does not require heavy staffing – jobs such as looking after the front desk and an adjacent coffee bar area at non-peak times can be combined.
Laundry, housekeeping, and food and beverage contracts can often be secured on better terms by a manager with good market knowledge and negotiation skills.
Next, revenue. If a bed is not taken in an evening a profit opportunity has been wasted. The additional laundry and cleaning costs of occupancy are not that great. So filling rooms every night – even at a discount – can make a substantial difference to revenue.
In some hotel investment opportunities it has been surprising to find that previous management had not negotiated off-peak corporate deals with big local businesses and tourism venues.
