Recent events have again shone an uncomfortable light on the use of fractional investment in the hotel world, with small investors exposed to the risks inherent in backing newer, unproven real estate operators.
In November, UK media headlines suggested investors in Signature Living were being deprived promised repayments. Comments from Signature founder Laurence Kenwright suggested that he was ploughing every spare penny into completing outstanding projects, while promising investors they would, in due course, get their promised returns.
The hiccup followed a summer when investors in Northern Powerhouse Developments discovered the likely shortfall in their returns, having backed the innovative hotel company. NPD went into administration after building a nine-strong portfolio of hotels around the UK. Administrators have hired agents Sanderson Weatherall to market the properties, with asking prices totalling GBP13m – contrasting with investor debts of substantially more. More than 300 private investors have joined a class action, faced with standing to lose most of their investments.
Elsewhere, the use of fractional ownership as an investment model continues across various sectors of buildings with beds. One of the latest offerings is from Experience Invest, with a 7.5%, three year guarantee for those investing in its latest student accommodation project in Cardiff. The company has been in business for 15 years, offering a mix of buy to let apartments, student and hotel investments around the UK.
Signature, which has built a portfolio of UK hotels by often taking on complex refurbishments of historic buildings, has used fractional investment support along the way. Earlier this year, it completed a promised five year buyback from investors in its 30 James Street hotel in Liverpool, taking control of the asset. It then put the property, plus another Liverpool hotel, on the market, planning to recycle the GBP50m proceeds into its development pipeline. Signature has had challenges undertaking projects in Belfast, where it recently said it would sell two development schemes, blaming problems with the city’s planning process.
Back in 2015, NPD chief Gavin Woodhouse was running MBi Group, which was attracting individual investors to buy rooms in care homes, as well as hotels and student accommodation. Care home rooms were being offered for GBP85k each, and investors were promised a 10% return, as well as a guaranteed buyback in time.
The group was later reorganised, with NPD set up to focus on developing the hotel portfolio, while affiliate Giant Hospitality would operate the projects. In 2017, the company said it would wind down its care home activities. NPD then set about acquiring a number of hotels in UK coastal locations, favouring north Wales and the south west.
In early 2018, Woodhouse was on a panel at a Hotel Analyst conference, at which he acknowledged that retail investors filled a gap, when institutional funds were hard to attract. “It’s come at a cost – it demands higher returns – but it has been flexible. We’re part way into a five year business model.”
The Northern Powerhouse business started to unwind in mid 2019, as UK media channels ITV and The Guardian investigated the company, finding that promised care home developments – backed by many private investors on a per-room basis – had not been started. The company subsequently fell into administration.
Meanwhile, property group Shepherd Cox, which Hotel Analyst has previously profiled, is one UK-based company that continues to offer single room investments in hotels. The company buys trading assets, offering partnering investors either a fixed monthly return, or a mix of regular return and a share of the equity upside. Founded in 2012, the group has grown its portfolio to 21 hotels. Investors are promised a guaranteed rental yield.
“In order to have a successful fractional scheme – in any area – you’ve got to have a good balance sheet,” warned Andrew Harrington of AHV Associates, who advises investors across hotels and related assets. “There’s a huge amount of capital needed up-front, and you’ve got to have the operational skills – and some of the people who enter this area don’t have all the skills.” And he warned investors: “Selling a hotel room is not like selling an apartment – there’s no secondary market. It’s superficially interesting, but practically very difficult to deliver.”
Perspective [by Chris Bown]: Oh dear, another bad year for fractional hotel property investment in the UK, and probably on a par with 2008, when high profile Guestinvest went into liquidation.
Fractional investment can work across a range of property developments, that is clear. But there are big issues for investors, and for those borrowing – fail to address these, and problems are not far behind.
For the investor, there is the need to be clear about an exit route. Buying an apartment, which can be sold at will in a largely liquid property market, is very different from buying a hotel room, or student accommodation, set within a block that has far higher management overheads, where there is generally no second-hand market. The exit will probably need to be via resale to a management organisation, or to the lead investor/developer, perhaps at a contracted future fixed date. There is also the need to be clear about the risks of investing in lightly regulated parts of the property landscape.
For those borrowing, there are substantial liabilities in the promise of future return payments, and buybacks. They can’t as easily be dialled down, as can a share dividend, when the going gets tough. And unless the borrower can make sensible provisions for those liabilities, trouble lies ahead.
At Signature, it appears there are short-term cashflow issues, as the company looks to sell some of its mature developments, and as work in progress proceeds slower than hoped. But its hotels around the UK look to be trading positively. Your correspondent based in Cardiff can testify that the Exchange Hotel is doing a roaring trade in festive season events.
At NPD, there are wider questions, with administrators taking a closer look at accounts, to establish where funds supposedly destined for hotel investments actually ended up. This could simply be a case of poor governance, something that a sound due diligence investigation might have flagged up, ahead of any commitment to invest.
Investing in hotels, or other buildings with beds? The evidence is that such a move will probably be a sound one – so long as you take care and do your due diligence.
But, if you want a truly liquid investment, there are plenty of hotel stocks to choose from.