Money is not everything when it comes to investing in hotels - What to consider

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By Jose Pinto

 Investing in a hotel differs from other real estate activities, such as commercial or residential, due to different variables of income generation, cost managers, time and business dynamics. But there is a difference between Investing Travel and Leadership, "Travel is full of Joy and Experience regardless of destination".

dynamic

Hotels are much more sensitive than any other business to the global economy and financial turmoil as they are capital intensive and investors should consider that they carry a higher risk of failure. The model of operation of hotels means that they are more vulnerable to general economic conditions. Most capital investment and borrowing decisions depend on net income and cash flow generated.

A large portion of hotel revenue comes from the combination of accommodation and room level, REVPAR. Both of these factors are heavily influenced by consumer spending power, the general state of the economy (during difficult economic times, leisure is one of the first items to be canceled (corporations keep business trips to a minimum) and the availability of government-controlled alternatives (competitive hotels and nowadays, Airbnb and other regional or local applications) .Last mention can be a real “pain” for any investor and hotel manager in any corner of the world, as they underestimate everything you do to stay afloat and keep your most valuable assets (human and material) consistent and in good condition.

When the economies and the World are well run and there is no other financial crisis in the top 20 countries, World Leisure and Businesses have a margin to spend and therefore hotels are in high demand and this ensures new investments and the introduction of new hotels in the market. More branded rooms in the market offer more awareness and also give consumers more power to bargain, so independent hotels, residences and other small suppliers are forced to lower tariffs to keep booking levels high.

If so far the hotel life cycle is approaching strong investments to maintain their continuity and competition at the same time, there is even more pressure on room rates, in order to attract customers to a slow economy. New hotels in the market are also pushing existing hotels to increase their investment in facilities and services.

For investors what matters most is the net cash available. When there are low reservations, low room level and poor performance performance, the cost of debt does not change. It is very important that investors and hotel owners understand the challenges of investing in a hotel and adjust their expectations and finances accordingly.

It is highly recommended that private investors study well before making any investment. Real and fully visible plans are recommended, including a well-established market, as well as geopolitical and demographic surveys. These need to be constantly adjusted and reviewed depending on the changing dynamics of the market location.

Money is not everything when it comes to investing in hotels - What to consider 1

Location, Location and Location

Location can be a winning or losing factor for a new hotel. Location decisions can have a huge impact on costs and revenue. A business needs to decide on the best location taking into account the needs of the customers. Being in the right place is a key ingredient to the success of a business. If a company chooses the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location plays an important role in a company’s profits and overall success. A visibly well-prepared study, conducted by professionals in the field, should take into account location, proximity to different countries, amount of competitors, as well as the presence or cooperation with local corporate businesses as all of which can contribute to strong performance of a hotel. Therefore, the location of the hotel exerts a major impact on revenue, cash flows and their value.

People, People and People-the important trio

Despite investing in physical assets, investors often forget that hotels are part of the service industry, driven by people, cultures and experiences. No matter how good your location is, no matter how bright or up-to-date the new infrastructure is or how innovative the Restaurants and Bars are, how interactive your waiting rooms are and what brand you will choose or have, it is the staff and management of “Human Capital” that can make or break the hotel and its success. Investing in your employees is not cheap, but it is worth it. If you are looking for high quality ROI, invest in your employees. Poor management, poor quality and service, always leads to dissatisfied customers no matter who or where they come from, this will lead to fewer visitors and the spiral will continue like a snowball. If guests are happy but managers can not manage their costs, then the benefit is reduced. Therefore, the performance of a hotel depends largely on the team that manages, operates, and takes care of your investment. There are many cases when an investment in a hotel is made based on excellent market conditions and positive ROI but due to poor management, the hotel has never realized its potential, the value will fall and a "sinking" is expected to it happens all the time, but if you think about it, don't build a business but start building people - and then people build the business. Things will be different from "Zero Level"

The people you decide to hire are the ones who elevate or destroy the investment in your hotel. Investing in your employees and managers is a good use of your time, money and company image and is a guarantee that your investment will pay off.

And remember .. you may have the best location, a hotel or a chain of hotels, but if you do not get a trained, motivated and happy team, you are a candidate to slow down your return on investment and in most cases go towards a failure.

Jose Pinto is the founder of JP HOSPITALITY.EU - (www.jphospitality.eu)

 

* Below you will read the English version of the article, according to the original publication in the print version of "Star Business" magazine, January 2020. 

 

 

MONEY IS NOT ALL WHEN MAKING HOTEL INVESTMENT - WHAT TO PONDER

 

BY JOSE PINTO *

Investing in hotel differs from other real estate assets such as commercial or residential due to the different income generating variables, cost drivers, time and business dynamics. But there is a difference between the Investment Journey and the Direction, the "Journey is full of Joy and Experiences regardless of the destination" 

The dynamics  

Hotels are a lot more sensitive to global economics and financial turmoil than any other business since they are capital intensive and carry a higher risk of failure that investors need to take into account. The operating model of hotels means they are more at risk to the general economic conditions. Most of the investment & capital borrowing decision hang on the net income and cash flow produced.

A large chunk of hotel's revenues is derived from a combination of room occupancy and room rate, the REVPAR. Both of these factors are highly affected by spending power of consumers, general condition of the economy (during hard economic times, leisure is one of the first items to be cancelled, corporations keep business travel to the strict minimum) and availability of Government uncontrolled alternatives (competing hotels and nowadays, Airbnb and other regional or local Apps). The late mention can be a real “pain” to any investor and hotel management in every corner of the world as they undercut anything you do to stay afloat and keep your most precious assets (human and material) ongoing and in good shape 

When the economies and the World run well and there is no other financial crisis in the Top 20 Countries, the World Leisure and Businesses have margins to spend and therefore the Hotels are highly demanding and that fuels new investments and introduction of new hotels in the market . More branded rooms in the market provides more awareness and also gives more bargaining power to consumers, hence the standalone hotels, residences and other minor supply are forced to drop the rates to keep up the occupancy levels. 

If by this time in the hotel life cycle is approaching the strong investments to maintain them ongoing and at par with competition, there is even more pressure on the room rates in order to attract customers in a slowing economy. New hotels in the market also prompt existing hotels to up their investment in facilities and services.

For investors what matters most is the net cash available. When having lower occupancies, lower room rate and poor operating performance results the cost of debt does not change. It is very important for investors and hotel owners to understand the challenges of hotel investment and adjust their expectations & finances accordingly. 

It is strongly recommended that private investors do study well before making any investment. Full and real visibility plans including well founded marked, geopolitical and demographic surveys are recommended. These must be adjusted and reviewed constantly in view of changing of the market location dynamics.

Location, Location and Location 

Location can be a winning or losing proposition for a new hotel. Location decisions can have a big impact on costs and revenues. or business needs to decide on the best location taking into the needs of Customers                                                                                         Being in the right location is a key ingredient to a business's success. If a company selects the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location plays a significant role in a company profit and overall success.                                                        

A well prepared visibility study performed by professionals of the field, must take into consideration the Location and the proximity to various venues, amount of competitors, or presence or collaboration with local corporate businesses can all contribute to a hotel's strong performance. Therefore, the hotel's location exerts great influences on revenues, cash flows and its value.

People, People and People-the important trio 

Despite investing in a physical asset, investors often forget that hotels are in the service industry, driven by people, cultures and experiences. No matter how good your location is, no matter how shining or up to date is the new infrastructure or innovative are your Restaurants, Bars, and how interactive are your guest rooms and what brand will you be choosing or having, it is the "Human Capital" staff & management that can make or break the hotel and its success.  Investing in your employees isn't cheap, but it's worth it. If you're looking for high quality ROI, invest in your employees.                                                                                                     

Poor management visibility, poor quality and service always leads to unsatisfied customers regardless of who or from where they come from, this will lead to fewer repeated guests and the spiral that continues like a snow ball. If guests are happy and the management cannot manage their costs then the profitability declines. Hence a hotel's performance is primarily dependent on the team that leads, operates it and takes care of your investment. There are numerous instances where a hotel investment was made based on great market conditions and positive ROI but due to poor management, the hotel never realized its potential, the value will decline and the “shipwreck” is expected anytime, but if  You think you do not build a business but you start building people - and then people build the business. ” Things will be different from “Ground Zero” 

The people you choose to hire are what it makes or breaks in your hotel investment. Investing in your employees and management is a good use of your company time, money, and image and is an assurance in your return on investment. 

And remember .. you can have the best location, hotel, hotel chain but if you do not have a team of staff well trained, motivated and happy you are a candidate to slow return of your investment and in most cases to a failure… .. 

* Founder of JP HOSPITALITY.EU (www.jphospitality.eu)

 

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