Understanding Hotel Development & Ownership Risks

Understanding Hotel Development & Ownership Risks

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Resort Hotel Development Risk

Would you want to be in an asset class if :

Gestation Period

  • There’s a long gestation period. A new hotel development can take up to 10 years to stabilize (2 year design, 3 years construction and 5 years to establish market presence & stabilize income).

Income Volatility

  • There’s no long term income guarantee compared to other commercial real estate.
  • There’s income volatility due to circumstances beyond managements control. An example would be the SARS epidemic that plunged travel which impacted hotels and airlines.

Capital & Operationally Intensive

  • You’ve to maintain a constant market presence in order to keep guests coming through the door.
  • You’ve got to keep the look fresh and the furniture in good condition every few years or else you lose pricing power.
  • It’s a labour intensive business that’s got to be in tip top condition and offer great customer service, unlike other commercial real estate which are more assets plays. If the business does not operate efficiently the hotel loses value.

Less Liquid

  • It’s a relatively illiquid asset and capitalization rates can fluctuate widely between good and tough times.

It’s definitely not an asset class for the faint of heart but it comes with benefits that the owners of industrial properties don’t get!

Photo : Gwynne K

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