Wealthy investors turn to hotels as dynamic assets

Many wealthy viewers of The White Lotus, the hit comedy-drama series set in luxury resorts around the world, will have been inspired to book a stay in a five-star hotel. But some have gone one better — by buying entire establishments.

A bidding war for Venice’s Hotel Bauer broke out earlier this year, with global investment company Mohari Hospitality beating offers from billionaire Bernard Arnault, among others, according to Bloomberg reports. And, last year, entrepreneur and PR guru Matthew Freud opened the Bull hotel in Burford, in the Cotswolds region of central England, followed more recently by a second hotel in the town, The Highway Inn.

Family offices have been snapping up hotel assets, too — particularly in Asia Pacific, according to global property consultancy JLL. It reports that, in the first half of this year, there was a 19 per cent year-on-year increase in hotel transactions in the region, taking their total value to $5.7bn.

Hotels have long been an attractive option for sophisticated investors. But the asset class is even more popular with the wealthy and their family offices at the moment, because of the post-pandemic recovery in the travel sector and hotels’ ability to ride higher inflation by updating their prices daily.

Christine Curtiss, global family office head at BNY Wealth, says “there’s definitely interest” in hotel investment among her company’s family office clients. “Property values tend to appreciate over the long term and the room rates rise with inflation, so they really act as an inflationary hedge,” she explains. “[Hotels] act as a store of value and as an income source — both key priorities for wealth preservation.”

A recent survey of 189 family offices by BNY Wealth found that property was the third-biggest asset allocation class after private equity and public equity, with hospitality assets, including hotels, a key area of interest, notes Curtiss.

Property assets that are also operational businesses, such as hotels and resorts, have been popular in an environment of higher inflation and interest rates since the pandemic and the war in Ukraine, agrees Will Turner, director of fund services at JTC Group. “Hotels are making revenue on a day-to-day basis, so they can set their price dynamically to reflect the cost base,” he points out.

Hotels have “significant value-add opportunities”, Turner adds. “It’s not just room rates. There’s a lot of cross-sale opportunities, like food and drink, healthcare, spa and shopping.”

The most sought-after hotel investments are those in cities that attract both tourist and business travel. Those that can also benefit from demand spikes caused by music, sport or cultural events (such as Taylor Swift and Beyoncé’s world tours) are even more attractive.

Fund managers that Turner speaks to are highlighting western Europe as the region with the most attractive investment opportunities, particularly the UK and Switzerland. Nihat Ercan, chief executive of Asia Pacific hotels and hospitality at JLL, says family offices looking to invest in hotels tend to be “buying in key gateway cities, like Singapore, London, Tokyo and Paris”.

However, it is important that those interested in investing in hotels and resorts accept that the asset class is “highly cyclical”, warns Ben Yearsley, a director and co-founder of Fairview Investing. That means hotel investments ebb and flow with the economic cycles of growth and recession.

“The second the economy turns, the hit is immediate,” adds Kevin Brown, senior equity analyst at Morningstar, who specialises in hotels and residential real estate investment trusts (Reits). “Once you hit a recession, the first thing everyone does is cut out unnecessary travel from their purchases . . . so, every single recession, you see a massive crash of revenue and profitability in hotels.”

The hotel business model also faces the challenge of short-term rental providers, most notably Airbnb.

Finding investment opportunities can be difficult, too. Hotels are a relatively difficult asset class to gain direct exposure to, both because of the expense of buying individual properties, and because of their illiquidity — the difficulty in buying or selling them quickly.

They are, therefore, typically only suitable for sophisticated investors, who have various options: ranging from investing alongside private equity firms to buying a hotel directly or investing in publicly listed Reits.

Brown says that “unless you are a big institution with hundreds of millions to invest”, publicly listed Reits are the best route into the asset class.

“What we see [is] that funds are a good way for family offices to gain exposure to this segment if they don’t have specific expertise,” adds Curtiss at BNY Wealth.

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