HOTELS are one of the least understood options for investments, often viewed as a closely guarded secret by those in the know.
Can you actually invest in hotels? Should you invest in hotels? What are the risks? Who are the stakeholders involved in hotel investments? Here’s what you need to know.
Definition
While a formal definition eludes consistency, the contemporary consensus carries the impression of a hotel as short-term lodgings in either shared or private rooms, both with and without facilities, across varying levels of perceived quality.
There are many methods of categorising hotels, and the popular Star Rating is not a preferred taxonomical method by those in the industry.
This stems from grading inconsistencies in different regions, fuzzy criteria, subjective metrics, and different groups or bodies assigning the star ratings, which ultimately affects its reliability.
In terms of perceived quality, hotels are typically rated in scales or classes, ranging from the budget oriented “economy” to the range topping “luxury”.
Hotels can additionally be classified by how they generate their primary revenue, typically divided between commercial hotels in urban settings, resorts with leisure-oriented facilities and gaming hotels.
Other hotel categorisations further based on descriptive attributes include extended-stay, full or limited service, boutiques, all-inclusive, all-suites, conference and time-shares.
A hotel represents a business encapsulated within real estate. Hotel investment and ownership merges both real estate and business elements indivisibly, requiring knowledge of building management as well as day-to-day operations of the hotel business.
This hybrid asset class is immutably further demarked by complicated agreements dictating relationships with essential service providers, contractually binding across lengthy durations far surpassing the typical two-to-three-year leases of other commercial properties.
This duality results in risks being assumed from aspects of both real estate ownership and business operations.
Location
A hotel’s performance is heavily dependent and significantly influenced by its location. For instance, hotels situated in high-demand tourist destinations or business districts, or in close vicinity to popular demand generators such as landmarks and attractions tend to experience higher occupancy rates and can command premium room rates.
Characterised as simultaneous domestic production and foreign consumption, a hotel’s market is reliant on both the local economy’s performance and global factors like tourism trends and geopolitical stability.
The primary difference with other export industries, is that hotels are service based, not goods, and consumed within the host country itself.
Despite being bounded by location, a hotel is practically not affected by trade restrictions in terms of its economic base, and remains one of the most globalised industries.
While having a preference, most hotels have no restrictions towards the type of guests they accept, with the only measure of eligibility being the ability to pay. How many other industries enjoy this flexibility?
Dynamic and volatile
In addition to being undeniably dependent on other economic sectors, make no mistake, a hotel’s business is dynamic.
Other than standing contracts, every room is resold daily. People stop by for meals sporadically. Events such as concerts and celebrations are announced randomly. Pandemics pop-up without prior notice. Therefore, it is suggested that hotels are the closest linked property sector to the economic pulse.
Other than dealing with the cyclical nature of industry, guest seasonality and event sensitivity, a dependency on both local and global factors, results in higher cash flow fluctuations than conventional real estate investments with typical long-term leases, indicative of being an arguably volatile form of real estate.
Furthermore, due to its purpose-built configuration and lengthy management agreements, which discourages and frequently inhibits other forms of utilisation, a hotel further compounds its capriciousness with a business component containing specialised multi-faceted operations.
Hotels are typically characterised by a heavy reliance on labour and management expertise. Even prior to embarking on a hotel development, the “go” decision is often preceded by an appointment of advisors and consultants specialising in hotel developments.
When it comes to the identity of the hotel itself, there are multiple affiliations and parties involved, ranging from the parent companies, chains, brands, hotel operating companies, ownership entities and asset management divisions.
Hotels are operational businesses, where success largely depends on the expertise and preparedness of the management team.
The experience of the management and the effectiveness of the distribution framework are crucial factors in driving the hotel’s performance and ensuring long-term success.
On a positive note, the labour intense nature of hotels provides avenues of gainful employment to the community.
Financing
One indirect and supposedly unintended result caused by shortcomings in reporting metrics is the availability of financing for hotels.
It is human nature to shun the unknown, and the lack of transparency in hotel transaction data has contributed to the alleged esotericism associated with hotel investments.
Hotel investments typically involve a lower financing margin compared to other types of real estate. As such, the borrower’s creditworthiness and financial profile are of paramount importance in securing funding.
Lenders focus not only on the property’s characteristics, such as location and potential for revenue generation, but also on the borrower’s ability to manage the asset and meet debt obligations.
Strong credit and a proven track record in hospitality management can significantly impact loan approval and favourable financing terms.
Size
Hotel transactions are often considered as comparatively large lot sizes in terms of pricing. The purchase of a single high-priced hotel may completely shift the nature and exposure of a holding entity’s or fund’s portfolio entirely.
Depending on the portfolio size and ratios, what they lose in diversification may be repaid in higher risk-adjusted returns.
Related transaction costs can be relatively high, considering the additional specialised due diligence conducted by a hotel consultant, legal fees, duties and valuation fees involved, even more so if the holding entity is required to regularly update their portfolio’s NAV and engage in active asset management.
Structures
The restrictive nature of hotel investments has in turn facilitated a test bed of creativity in terms of different entry modes and investment structures.
For hotel chains, this avails options of entry to host countries by navigating political and economic risks, as well as circumventing cultural distances.
For investors, hotel investments can be accessed via direct ownership, REIT or fund, shareholdings in private companies or public companies. Each structure comes with different levels of risk, return, and participation involvement.
While hotels provide multiple avenues of value creation and value capture, there are evidently challenges in investing into hotel developments, particularly in the Malaysian context.
But should you invest into hotels? Yes, when it makes economic sense to. – March 5, 2025
Dr Timmy Ho is a certified hotel valuer, chartered manager, academic researcher and the Managing Director of the hotel asset management firm Pragmatique Sdn Bhd while Sr Yap Kian Ann is a registered valuer, estate agent, property manager, international certified valuation specialist and the Managing Director of Agility Valuers & Property Consultants Sdn Bhd (AVPC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
