Property: Buying a hotel

When searching for a hotel you have to remain flexible -  your perfect property might not come up in the town or village you want every day

In the third part of our special feature on property, we ask experts for their tips on hunting for a hotel and calculating the future profitability of any potential property.

With so many different types of properties on the market – all of which will offer a different balance between lifestyle and profit – the first step of any search is to establish what sort of hotel you want to buy.

According to hotel property specialist Christies + Co, independent hotels and guesthouses generally fall into one of the following broad categories:

  • Guesthouses – small than hotels, with typically fewer than 10-12 bedrooms
  • Coastal hotels/guesthouses – often small and family run, tend to be dependent on seasonal holidays and might only operate for part of the year.
  • Country house hotels – tend to offer high standards of accommodation, food and service, with some offering additional leisure facilities such as a swimming pool, spa or gym.
  • Commercial/business hotels – typically on the outskirts of towns and cities with good transport links, attracting conference and corporate business as well as leisure guests.
  • Hybrid hotels – hotels in prime locations deriving business from a mixture of seasonal trade, business clients, passing trade and year-round tourism.
  • Boutique/townhouse hotels – typically located in town or city centres and luxuriously furnished and/or design oriented
  • Budget hotels – normally part of, or affiliated to, a chain, offering basic accommodation and limited service.
  • Backpacker hotels – a form youth hostel, usually located in cities and catering for independent travellers of any age and means.
  • Central London hotels – a specialist market where even a modest guesthouse can be priced at well over £1 million.

Deciding what category of business you are looking for depends very much on your skills, experience, budget and the lifestyle you want.

“Skills and experience is a very important factor – is this your first business or have you had hotels in the past? That might limit your approach from a 4-5 bedroom guesthouse to something much larger,” explains Paul Hardwick, head of hotels for Fleurets.

“You should also think about why you are buying a hotel - is it a lifestyle change because you have left London with a substantial redundancy package and would like to enjoy life more and work less or this is very much a commercial business which is your future income that you have to protect.

“Finally, you need to consider your resources – what funds do you have available, can you only look at leasehold opportunities or can you afford a freehold. Are you tied geographically or financially?”

Remain flexible

Once you have established the sort of business you are looking for, you can start scouting out potential properties. Although location is important, and you may know exactly where you want to buy, it is important to remain flexible when on the hunt for a hotel business.

“The type of hotel you want and your finances set the parameters within which you should be looking, but you do have to maintain a fairly flexible position,” says Hardwick.

“If you want to buy a business and move in within a 6 to 12 month period, hotels just don’t come up in the town or village you want every day.”

As a result, you might have to look regionally rather than in a particular county, and approach potential properties with an open mind.

“Sometimes you need to take a different approach- look the property like a blank piece of paper and ask yourself whether with some expenditure, perhaps based on a lower price, you could turn it into what you are looking for,” Hardwick advises.

Understand the business

As when buying pubs and restaurants, it is vital to gain a full understanding of any potential business before putting in an offer.

“No matter what sort of hotel you are buying, remember it is a business and it vital to understand the details of that business- the good, the bad and the ugly,” says Hardwick.

Christies + Co recommends that you ask the current owner for up-to-date and historical financial accounts,  ideally at least three years’ worth, and remain sceptical of vendors who can’t do this.

Consider whether the current profit margins are too low or two high, whether costs are under control and what sort of wages are paid out.

Key metrics to look out for when establishing profitability are average occupancy rate and revenue per available room, which you can compare to local and national averages. You should also consider the ratio of staff costs to turnover – although bear in mind that different types of hotels will have different staff requirements and you just have to ensure staff costs are in line with the kind of business you are purchasing. If the hotel has a restaurant, find out how much the food service element contributes to turnover.

You should also ask questions about the demographics of the hotel’s customers, whether or not it has any deals with local businesses, whether there are key staff members without whom everything would fall apart – anything that will give you a clear perspective on the current business and its future potential.

“When looking at the business you have to look at it how it is now, how it has performed in the past and what it has done,” says Hardwick.

“But ultimately you are buying it with a look to what it is going to do in the future. For every aspect of that business you have to ask yourself why it has done that level of trade in the past, what supported that trade, is that support still going to be there in the future, or is there scope for that trade to improve.”

Competition

Another vital consideration when buying a hotel is the rapid growth of the branded market, which could lead to unwelcome competition.

At the moment, the number of branded hotels in the UK as a proportion of the total is quite a bit lower than other European countries and the US, and it is generally accepted that there will be significant further growth of brands in the future.

However, the UK’s private hotel sector is still thriving, with some great opportunities, so there is no need to worry if you buy sensibly.

“Find out what proposals there might be for new competition in the area, which hotels are being refurbished and what new hotels might be built,” Hardiwck advises

Physical checks

Finally, you need to carry out physical checks on the property, including a full survey and valuation, with particular attention paid to the owners accommodation, the state of the bedrooms and facilities like the kitchens and staff accommodation.

You should also check out the terms of any lease or freehold carefully, to make sure you fully understand the business conditions.

If the survey report throws up concerns you can use this to negotiate a lower price – but beware buying a business with too many physical faults.

“The property risks are probably greater due to the scale of a hotel business,” Hardwick warns.

“The likely cost in terms of outgoings, maintenance and repair is significantly higher than a pub or restaurant, so the importance of fully understanding the nature of the property, the obligations and its state of physical repair is probably even more important for a hotel.”

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