DISPELLING THE MYTHS ABOUT HOTEL INVESTMENT
There are a number of key misconceptions or “myths” amongst investors surrounding investment in hotels compared to office investments.
Hotels have more volatile returns than other property classes
Hotels are more susceptible to supply shocks
Hotels are more capital intensive
Hotels have demand levels that are extremely volatile
Hotels are valued at similar capitalisation rates to office properties yet carry greater risk
MYTH 1: Hotels have more volatile returns than other property classes
Hotels compare favourably to all assets classes on a volatility adjusted returns basis and have outperformed in absolute returns.Office returns are almost as volatile as hotel returns but have produced significantly lower returns over the past 6 years
MYTH 2: Hotels have demand levels that are extremely volatile
Demand for the 9 major CBD hotel markets has only fallen once in the past 22 years and only by a mere 1.4% despite short term demand shocks
MYTH 3: Hotels are more capital intensive than other property classes
Hotels have been shown to be slightly more capital intensive than both office and retail asset classes. There has however been a significant reduction in office and retail capital expenditure post the GFC due to capital constraints
MYTH 4: Hotels are more susceptible to market supply shocks
Compared to office, hotels are less susceptible to market shocks
MYTH 5: Hotels are valued at similar capitalisation rates to office properties yet carry greater risk
In major office and retail markets net effective yields are below the cost of debt. Hotels provide a significntly higher true yield.
Hotel true yields are significantly higher (over 225 basis points) than office and retail true yields after allowing for vacancy, leasing fees and incentives are taken into account (true yield).
Written by Glen Boultwood this article discusses some of the long held preconceptions about investing in hotels and tests whether they hold true. Source of graphs: MSCI, JLL Research, ABS, RBA
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