In part 2, we take a look at the REITs hospitality sector in terms of the different types of investing opportunities available and the common considerations one should make before taking the leap.
Apart from offering liquidity (they are traded on the stock exchange) as well as diversification, REITs are generally managed by professionals who have had years of experience in the particular industry, increasing the potential for higher returns on investments. Hospitality REITs can be broadly categorised into those that manage hotels as well as those that park their investments into service residences.
These forms of investment focus on developing, managing, acquiring, or financing hotels. They range from budget hotels to five-star (or more) establishments as well as the boutique variations that have gained popularity over the last decade or so.
Hotel REITs involve developing and owning the hotel or paying a third-party management team to handle the actual running of the hotel in exchange for a share of overall revenue. They can also commonly encompass managing other people’s hotel properties for a cut of revenue.
What investors have to be cognisant about when investing in these types of REITs is that they are extremely volatile. Their success and failure depends on such variables as economic conditions that directly affect tourism, as well as local job figures and an over supply of lodging (which can slash prices by increasing competition).
A hotel takes a lot of money to run, with utility bills, amenity management and huge manpower demands being only part of the story. A few factors that have to be taken into consideration are the track record of the trust along with the overall projections for the industry moving forward.
Service Residence REITs
REITs that predominantly cover this area of the hospitality industry work on a similar premise to the hotel ones. They also involve the company managing, acquiring, or financing these types of properties, and they too can encompass managing other people’s properties for a cut of revenue.
One way in which this medium differs to hotel REITs is that they are less volatile as an investment vehicle. Firstly, they take less capital to start and cater mostly to businesses that provide for a steady supply of occupants due to employees flying in and out of the region. Leases for hotels are usually on a per night basis, while service apartments have a minimum term and can sometimes be booked for several weeks to months and even years by large corporations looking for better rates.
Service apartments have also gained popularity over hotels with tourists who enjoy having facilities such as a kitchen and laundry area within their place of residence. In addition, such apartments also afford occupants with families a sense of privacy while on vacation.
Although there are REITs that cater specifically to investments in either hotels or service residences, it is also common to find those that invest in both, gaining advantage through diversification. Hotel REITs tend to add a few service residences to their portfolio to cater to a growing pool of clients who value the freedom and services that they provide.
It is clear that when investing in hospitality REITs, a strong understanding of the fundamentals of the country they are based in is one of the most important factors to consider. One should take a look at tourism figures as well as business traffic volumes to gauge how well they will perform in the medium to long term. If chosen correctly, these REITs can provide for both attractive returns on investments as well as competitive dividend pay outs to investors.
Thinking about investing in local real estate instead? Check out the article here.