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Jeremy Oliver explores some of the funding sources available to hotel chains when looking to expand.
Hotel room occupancy remained constant in 2015 at 73 per cent according to Visit England, but it has not dampened appetite for new hotels. The latest STR Global Pipeline Report shows significant growth in the number of hotel rooms under contract (planned or under construction), particularly in Greater London which has the most hotel rooms under construction in the whole of Europe. At the turn of the year, there were 4,792 rooms under construction in 33 hotels in the capital city alone.
So how are those chains funding their new premises? And how can smaller establishments generate the funding to expand existing premises or open new sites? Here are some of the most relevant funding sources used by hotels, from well-established, mainstream funding streams to the upcoming and innovative.
The nature of the hotel industry, with bricks and mortar establishments operating on a proven business model, lends itself to mainstream secured funding, where a loan is secured against an asset such as property. Occupancy rates are up four per cent compared to 2012 and despite a plateau in the last year or two, the hotel sector continues to be attractive to both private investors and banks, as demonstrated by the current construction levels.
Leisure sector specialists can offer the same funding support as the mainstream banks or private investors, but with a greater understanding of the sector and often a portfolio of complementary investments.
Joint Venture funding structures separate the operating company (OPCO) from the property company (PROPCO). Many investors will talk about the need to separate the brains from the bricks, which refers to a structure where people stick to what they know; hotel managers run the operations, leaving investors to focus on the property. This can increase the appeal of a hotel investment and help to protect risk.
Separating the operations and the property asset in this way can also enable potential tax benefits. The Enterprise Investment Scheme (EIS), for example, is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies – but in the case of hotels, would only be applicable to the operating company.
Crowdfunding refers to the method of raising finance by asking a large number of people each for a small amount of money, often via the internet. It is becoming increasingly popular across a wide range of sectors, particularly leisure and hospitality.
For hotel entrepreneurs, crowdfunding can provide an invaluable funding source to give their vision the kick start it needs, even when other sources are not viable. For investors, when pursuing the right opportunity, it enables them to get involved with ventures right at their initial concept, which can help maximise returns. It’s a win-win situation when done well.
We must not forget that crowdfunding is still a relatively new platform. Investors are more likely to be backing a vision than an established business and there is still some debate over the valuations put forward by some fledgling businesses. However, there are more than enough success stories to prove the merit of crowdfunding in the hospitality sector.
Another interesting trend in the hotel sector is the growth of buy-to-let models, where hotels can raise capital by selling individual rooms on a buy-to-let basis. This model has already proved popular and in some regions where high occupancy rates can provide an element of guaranteed income, with examples such as Raithwaite Hall in Whitby.
Rooms are fully managed by the hotel operator and investors receive a return based on a percentage of the room income. In some cases there is a guaranteed minimum yield for an initial period to increase the appeal to investors.
With a far lower investment needed than more traditional funding sources, it has the potential to draw in a greater number of investors.