Unlocking your hotel investment: navigating hospitality real estate finance

Edouard Louapre, head of our Bachelor specialization in International Hotel Development and Finance, casts his expert eye over hotel real estate investment – the financial foundation of the global hospitality industry.

The first rule of any investment is that it must make a return. That’s simple and obvious; but the complexity comes from how an investor generates a sufficient return to repay the risk he or she has taken.

In hospitality real estate, the way that investors generate returns has more moving parts than most other segments of the property industry. It makes this a challenging and multi-faceted discipline that demands a profound understanding of what the hospitality ecosystem is, including factors such as market dynamics, changing guest expectations, macroeconomic impacts, and ESG. It also makes it – in my view – one of the most exciting and dynamic areas of this business in which to work.

In this article I hope to unpick the business of hotel real estate investment, explaining how it differs from investing in other assets like offices or retail premises. I will also break down the different types of hotel investment. Lastly, I will walk through the various steps in the investment/development process, right through to the exit strategy.

What is hotel investment?

Hotel investment is an important component of the wider real estate market. Investing in property is the engine room of our built environment: the construction of every building you see around you has to be paid for, whether it’s a personal residence costing tens of thousands or a master planned, mixed-use development costing billions.

In commercial real estate, it’s investors who provide this money; but they only do so with the promise that – as with any other investment – they will receive a satisfactory return.

One of the big differences with hotel investment is that often it will involve shared commercial interests between the hotel owners/investors and the operator of the property. Sometimes this can also be a three-way interest, where the operator is a third party management company (these are often called ‘white label’ management companies) and both are joined by the hotel brand which has its name above the door by way of a franchise agreement.

Whatever the owner/operator structure, driving the hotel’s commercial success is absolutely paramount to maximizing the return on investment it generates. And this is where expertise in asset management, revenue management, operational efficiency and – of course – the all-important guest experience come into play.

Navigating this environment demands a unique mixture of hospitality and business knowledge, and it’s why so many of our Bachelor students looking at careers in hotel investment choose the International Hotel Development and Finance specialization that I lead.

Doing so gives them a massive advantage compared to somebody who graduated from a traditional business school and therefore lacks specialized knowledge of the hospitality industry.

It’s also why all the major real estate consulting firms – Cushman & Wakefield, CBRE, and so on – have developed specialized hotel advisory teams to serve the growing number of investors keen to explore this sector.

Who are the hotel real estate investors?

In 2023, the European hotel investment market was worth some €10.7 billion – quite a way below the heady levels we saw before the pandemic, but still a sizeable share of the overall real estate investment market.

Who are the investors responsible for that transaction volume? The simple answer is that it could be any one of the individuals or institutions which are in the business of investing money – either their own or other people’s.

By that I mean banks, pension funds, insurance companies, sovereign wealth funds, private equity firms, specialized real estate vehicles such as real estate investment trusts (REITs), investment arms of hotel companies such as AccorInvest, and high net worth individuals or family offices.

Each of these real estate investors will have different investment objectives, risk profiles, target markets, and strategic approaches. But all of them are united in the goal of portfolio diversification.

And this is especially true at a time when the performance of other classes within commercial property, such as offices and shopping centers, has seen some slowing down due to changes in our working and consuming patterns, as well as broader economic downturns in some markets.

Types of hotel investment

The different types of hotel property to invest in match the different types of hotel we can stay in as guests; so everything from budget to ultra-luxury, from city center to beachside resort, and from a traditional brand to a funkier, more lifestyle experience.

All of these hotel real estate assets have their own attractions for investors; but before making a purchase an investor will have to focus on a number of specific considerations in order to make an informed decision.

Take resorts, for example. These are usually large-scale premises and can quite often be in remote locations. This means that developing (or buying) a resort will generally require heavy up-front capital investment, making it more suited to an investor who is interested in a longer term strategy.

Resorts are also predominantly seasonal operations, so good financial management and forecasting are essential, perhaps more so than a typical city center business hotel where the flow of guests is more regular throughout the year.

Luxury hotels, too, are generally subject to high up-front costs due to the high end design and fit-out specifications they need in order to meet the expectations of wealthy clients.

Take for example the magnificent Raffles OWO hotel and residences in London, which has reportedly cost its investor, the Hinduja family, £1.3 billion to create by transforming a former government office in the heart of London. Hotel investing at that level is a serious business.

On a more down-to-earth level, budget and mid-market hotels have also been a popular market segment among investors, as these are seen as more resilient to economic downturns (the same, of course, is true for the ultra-luxury segment).

This is important because, unlike the fixed and long-term nature of an office lease, buying into an operational asset like a hotel means investing in the day-to-day success of the business operating within it.

How to identify a good hotel investment opportunity

As with making any investment decision, the process starts with in-depth research. Before committing what could be billions of dollars (or equivalent) it’s vital to have a solid understanding of the local market conditions as well as an idea of future market trends.

For a development project, this includes the historical evolution of supply and demand dynamics, current tourism market analysis, competitor analysis (including daily rates), property valuations in the area, to name just a few.

For the purchase of an existing hotel real estate asset, the research must also cover the financial and commercial profile of the hotel operation: i.e. revenue, profitability, operating costs, and other elements of that nature.

Increasingly, an investor must also factor in the hotel’s ESG (environment, social and governance) performance, as this is becoming a consideration in obtaining finance at competitive rates – or even at all (some lenders will no longer provide credit for an asset that underperforms on ESG measures).

Once the asset is under ownership, sustainability performance in areas such as energy consumption and other eco-friendly practices will also impact the bottom line, particularly in a period where – in Europe at least – energy prices are higher than has historically been the case.

At the same time, governments are creating incentives for improved environmental and sustainable performance, so there may be tax breaks available that can enhance the financial performance and potential return on investment.

The key stages of a hotel investment

We’ve already covered the research element – often called ‘due diligence’ among the financial community.

The next step in the real estate investment process is the acquisition of the property itself, or in the case of a development project it could mean acquiring the land on which to build, if this is not already in the investor’s ownership.

For a hotel development, there are additional stages such as securing planning permission to build, as well as acquiring a business license to operate a hotel on the site in question. The latter is far from a formality, as the authorities will consider the risk to the environment from overtourism and of disturbing the competitive balance in the market, among other factors.

Developers will generally bring in professional support from lawyers, financial advisors and real estate consultants to help them navigate this process.

At the acquisition stage, financing the transaction becomes the priority. A lot of the time, this means getting a bank involved. If you have a household mortgage, you’ll already appreciate some of how this process works.

The figures involved with a hotel investment are considerably higher, so the bank will have a special team to evaluate the risk and prepare the financing offer accordingly. The prevailing interest rates in the country of the lender/borrower will also be a factor.

Once the transaction is agreed and completed, the hotel may simply continue trading or the new owner may wish to make changes. These differ depending on what the overarching investment strategy dictates. It could mean switching the hotel’s branding; exiting the current management contract and bringing in a new management company; or even closing the premises for a comprehensive remodeling/refurbishment in order to enhance future commercial performance.

One of the highest profile examples of the latter is the famous Waldorf Astoria New York. In 2014, this legendary hotel (pictured below) was acquired for $1.95 billion by the Chinese company Anbang Insurance Group, making it the most expensive hotel sold at the time.

Although it continued trading immediately after the purchase, in early 2017 it was closed for a comprehensive refurbishment that is still ongoing to this day, with the new-look hotel due to reopen in 2025. The budget for the refurbishment has been put at over $2 billion.

Even if a hotel asset does not see major changes made, the new owners will invariably want to look at implementing enhanced revenue and asset management strategies, as well as looking closely at operational costs, in order to drive improved financial performance.

For a development project, once the construction and fit-out is nearing completion, the hotel will enter pre-opening mode, with a team installed to deal with hiring staff, implementing IT systems, choosing daily rates and working on revenue management plans.

Further down the line, once the hotel has been trading successfully (and hopefully with enhanced revenues) the investor may well look for an exit strategy. This isn’t always the case – for global landmark hotels like The Savoy in London or the George V in Paris, the status of owning a ‘trophy’ asset overcomes the usual cycle of invest>hold>exit that most investors pursue.

For investors who are seeking to make an exit, timing is everything. Most will already have mapped out an exit strategy at the time of purchase, but there’s a great need for flexibility, because much depends on current market conditions and – crucially – what the investor forecasts to be future market conditions. Of course, other criteria may spur a decision.

For example, the investor’s overall financial wellbeing could deteriorate, necessitating the freeing up of funds; or maybe he or she might simply receive an offer for the asset which is too good to refuse?

Emerging trends in hotel investment

One of the most important trends in hotel investment is the diversification of revenue, and by this I mean incorporating other elements beyond hotel rooms in a hospitality development. Private residences are especially popular – the Raffles OWO and Waldorf Astoria New York examples I referenced earlier both feature a number of luxury private residences at prices running into the millions.

We also have to factor in broader trends in our travel and tourism behaviors. It’s super important to consider the impact of non-traditional lodging options such as Airbnb, particularly as competition for city center hotels.

Other pandemic-influenced trends such as the rise in ‘bleisure’ (mixing business and leisure) and ‘digital nomads’ are also significant factors today, whereas they probably didn’t feature at all on a hotelier’s radar 10 years ago.

And of course it’s still too early to judge the full impact of artificial intelligence (AI) on the hospitality business. It’s a revolution for sure, but in reality I don’t believe it will seriously change the short term residency business, which will always be a fundamentally human-to-human experience.

Conclusion

I hope in this article I’ve underlined the critical importance of hotel real estate investment and development to the wider hospitality sector. At the same time, I hope I’ve also whetted your appetite for this dynamic environment as a potential place to forge a career.

If you would like to learn more, a great place to start is our comprehensive guide to hotel real estate. Or if you are already a graduate and looking to specialize in this sector, why not take a closer look at our Master’s in Real Estate, Finance and Hotel Development, which delivers a unique immersion into the world of hotel real estate investment.

Photo credits

Edouard Louapre: Stéphane Kurdyban/Time Prod
Construction crane: bgwalker/Getty
Balconies: ewg3D/Getty
Swimming pool: mgstudyo/Getty
Waldorf Astoria: GordonBellPhotography/Getty