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Market Watch - Page 4:

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Rental Property - Plus & Minus, Buying A Hotel Unit.

 

 

 

When buying into mixed-use, hotel managed projects, there are important legal issues that must be clearly understood. Buying such a property differs from usual sale and purchase, or lease agreements of residential homes and units.

First, all too often customers expecting a certain yield are initially disappointed once the actual returns start coming in, so it's best to make informed decisions by obtaining quality legal and tax advice in advance. Buyers often confuse net and gross returns. Marketing and promotion material often show a percentage return, though this is usually subject to deductions.With internationally-managed properties, these deductions usually include charges credit-card commissions and a reserve for capital repairs or what hotels call FF&E (furniture, fixtures and equipment). FF&E reserves from 3% to 5% of reservations/commissions can exceed that amount.

Other typical deductions are common-area or cost recovery of expenses, tax on rental returns and insurance coverage (structure, contents and liability). In many instances, while a 50% or so return is shown in marketing material and highlighted in the contract, this would be the gross return. After deductions the net could be 40% or less.

These deductions are generally in keeping with sound hotel management and accounting principals, but it's important to know what your actual bottom line return will be. While residential estates use sinking funds, mostly charging annually or through special assessments, hotels use FF & E reserves, saving money from day one in order to address long-term refurbishment. Hotel-managed units suffer more wear and tear than residential units and soft goods must often be replaced every three to four years. The reserve can cover this in later years, but will not cover major replacements or renovations, so returns in later years are often subject to significant assessments, which affect profit.

Hotels, being capital-intensive assets, often see spikes in expenses over time, which makes mixed-use projects less to investors planning long-term, straight-line growth.

Buyers looking at using their during the year, the trend being 30 to 60 days,should look at restrictions of use during high season. "Free stays" are not always free

 

 

 

as usage fees often appy.

One must look at the usage fees and see how they are calculated. A "free stay" can cost US$40 to $50 a night or more.

For those buying on guaranteed returns, it's important to understand what options are available on expiration of the guaranteed period and whether the options are contractually in place or subject to change.

Ideally, units sold on leasehold are on land subdivided from the hotel. This protects buyers in case of a bankruptcy, foreclosure by a financial institution or legal claims against the hotel. It also limits the hotel owner to leverage or borrow against units that have been sold.

For long-term planning, it's important to ensure that registered right of ways, easements for utilities, services and access, as well as rights of use are obtained from the hotel part of the project, as this will affect the ability to resell units.

Another consideration is whether the units that comprise the hotel will eventually be converted into residential units. Nothing lasts forever and hotel and residential product cycles do not run in parallel. What happens, years later, if the hotel fails? It's not easy to answer such questions as these types of projects are still early on the development curve. Contracts need to include provisions for such scenarios.

People buying units on the strength of a brand must be aware that for the most part international brands are not the owners or developers of the project. Usually, a management agreement has been entered into for a specific term and duration, which needs to be disclosed to the buyer. What happens when brand contracts expire, change or the project can no longer be branded?

Again there are no hard and fast rules here. Another issue is that when hotels are sold, there is a change of brand that may in turn affect yields.

Life style investments are a global phenomenon. These are substantial purchases and. as in any transaction. it's important to understand the tine print and what financial consequences are in a contract and then make a fully informed decision.

 

   

Bill Bamett is Managing Director of C9 Hotelworks a Phuket hotel and residential consulting firm With more 20 years experience in the region, he has played an active role in some of the island biggest develovments.

       
       
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Archived Articles: 2007 - 2008

 

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US Financial Crisis - Living The Sub-Prime Life

 

Rental Income - Investment Rent And Raves

 

Aesthetics - Out With The New, In With The Old

 

Hotel Branded Realestate, Battle Of The Brands

 

Local Communities - Cables Gone Wild

 

Agent Commission, The Low Down About Paying Up

 

Aesthetics - Bold Designs Keep Boredom At Bay

 

Phuket - The Next Big Property Trend 2007

 

US Financial Crisis - Clouds The Property Horizon

 

Pre-plan your purchase, and prevent future pain

 

Vietnam, Too Fast Too Soon

 

Timeshare, High End Fractional Ownership Matures

 

How we should protect the property cash cow

 

Re-Inventing Patong

 

Budget Hotel Brands Shake Up The Scene

 

Property Developers - Number Crunching Pays Off

 

Bali, (property) Supply Surges Ahead

 

Aesthetics - Designing For Success

 

Phuket, Battle to preserve the beaches

 

Low Season - Cyclical Cynics

 

Phuket Luxury Villa Market Update Feb 2009

 

Khao Lak, Back To The Future

   
 

 

   
 
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