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Invest in a hotel room for the London Olympics?

by Andrea on April 1, 2011

Artist's impression of the Holiday Inn West India Dock (ready for London 2012) where you can buy your own room

East London is definitely where it’s at in terms of new London hotels.

Driven by the 2012 Olympics as well as by the increasing commercial might of Canary Wharf’s banking and IT businesses, the previously-overlooked East End is seeing huge construction right now.

But it’s also the home of some interesting innovation.  The Holiday Inn on West India Dock Road is putting individual hotel rooms up for sale through property experts Experience International.

Now get the idea of owning your own pad in London out of your head.

This is strictly an investment, says Stuart Johnson, Experience International’s Business Development Manager.  There’s no personal use included in the package – you pay your £189,000, and get a return from the room being rented out, which is expected to give you a net yield of 6.2% in the first year and up to 10% by year five.

That’s better than you get by putting your money in the bank, or even in the equity market.  Let’s compare it to investing in hotel company shares – Intercontinental yields 3.1%, Whitbread – owner of Premier Inn – 2%, Millennium & Copthorne 1% – numbers that certainly won’t make you rich.

You might think it sounds weird.  But hotel ownership and management have been separated for a long time, though most hotels have a single owner for the manager to deal with.   That’s true here as well – the owner of the freehold will deal with Holiday Inn (the manager) while investors will own their rooms on a leasehold basis, just like in an apartment block.

In fact, as Stuart Johnson points out, this kind of ownership structure is well known in the USA but has not often been done in the UK.  And though I’ve seen several  ‘aparthotels’ in London, they were one-offs – not managed by a major international brand like Holiday Inn.

The numbers appear to stack up, though you should always do your own due diligence.  Outcomes can often vary widely depending on the scenarios plugged in, as well as on unexpected events.

This will be a four star hotel, and the forecast yield assumes revenue per room of £110 a night and 80 percent occupancy.  By comparison, the existing Holiday Inn at Limehouse has 90% occupancy, Stuart told me; and rates in Canary Wharf hotels (one stop up the DLR) start at £175.

The West India Dock Road Holiday Inn will open in May 2012 – construction has already started.  Will its new ownership model start a trend, I wonder?

Apparently the developer has already got plans for a second distributed-ownership hotel in London.  But whether other developers will cotton on to the model remains to be seen.

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Photo credits: Holiday Inn West India Dock Road.

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