Should you be investing in the hotel sector?
One of the most interesting sectors in the UK is the hotel sector since the country has a clear focus on tourism. The hotel sector is very capital intensive but at the same time, it is a sector that usually does not offer high profitability due to the tough competition, which includes the apartments and hostels that in recent years have pushed prices down. In recent years, specialised search websites have appeared offering hotel offers, such as Trivago, which has allowed consumers to be much more demanding and search for accommodation that meets their needs at the best price.
The keys to investing in the hotel sector
The hotel sector has a delayed cyclical behaviour because it is a sector closely linked to leisure and users consume more leisure as long as their income allows. In a crisis or recession phase, leisure is the part of the income intended for consumption that is cut first because people understand that there are other priorities. On the other hand, after a recessive cycle when the economy begins to expand, the part of personal income destined for consumption becomes larger. So, we must take into account the evolution of GDP before opting, or not, for this type of investment.
It is a very indebted sector in general since it needs a large infrastructure to undertake its activity, so it is necessary to take into account that any rise in interest rates will have a very negative effect on the hotel business and interest rate cuts will favour the behaviour of the sector.
The stability of a country is key to the evolution of the hotel sector. If a country has some kind of geopolitical conflict it will most likely have a negative impact on tourism, so among the first businesses that will be affected will undoubtedly be hotels. However, it could also be that if a country were to encounter certain instabilities and consumers decided, as an alternative, to consume leisure in their own country, the geopolitical instabilities of foreign countries positively favour the evolution of the hotel sector domestically.
The microeconomic aspects are also fundamental to understand the hotel businesses since at the time of investing in a hotel we must know specifically their line of business. According to the quality of the hotel (five stars, four stars, etc.), an increase in the entrance of tourists from a higher disposable income profile will favour hotels of great quality. If it is more of an urban model or a more holiday-based model, the evolution of domestic tourism will be favourable to urban hotel models and foreign tourism will be key for holiday hotel models.
Other external factors
Political decisions, especially game changers such as Brexit, are variables to be taken into account to determine the evolution of the hotel sector. Tourism initiatives, planning restrictions, etc. can all have an influence, and could seriously boost or harm the profitability of hotel companies.
There is a certain degree of security investing in larger hotel brands with stellar reputations. A multinational hotel chain strategically positioned in the main tourist sites, with hotels in many countries, and continents, as well as sales offices, agreements with the main tour operators, marketing and sale of corporate programs, hotel discounts, weekends away and short breaks, etc. and customer loyalty and quality control programs, can be an attractive option.
Alternatively, smaller scale investment opportunities also exist in select private hotel investment projects, such as those managed by Maritime Capital which can offer a more targeted and niche-based approach to hotel operations. This can lead to more dynamic growth if the operation is in one of the high-demand growth sectors such as boutique hotels, but at the same time, lacks the same degree of security as a large multinational hotel brand.
There is no shortage of investment opportunities in the hotel sector, however, it is essential to ensure that any investment matches your personal investor profile in terms of risk and reward.