Investment in Holiday Rental Properties for Yield
If you own a holiday home, in a pristine hill station or near a balmy beach, you are one of the lucky ones; and if you happen to live in those quite often, then you are amongst the chosen few who life has truly rewarded.
For the rest who are not spoilt with such choices, the burning question through this pandemic has been, whether to invest in a second home, or to just use the holiday rental platforms; enjoy a staycation or two.
Let us try to tackle the conundrum and see if the insights act as more fodder for thought or tools to help plan your investments ahead!
Timeshare, Second Homes and Holiday Rentals – Differences Galore
Time share is something that has been popular, and still isn’t doing too bad. It started in Europe sometime in the boom after WWII and became very popular in the west. Working population was sold time of 1 week or thereabouts as a share in a property, for 21+ years (a long duration). These typical 1 week (s) every year (timeshares) were linked to either one property or a cluster of properties owned/ managed by one type of operator. Later, the operators started pooling these shares and the customers got a chance to exchange and expand their options, albeit, at additional costs.
Timeshare holiday rentals propelled vacation home real estate in most global tourist destinations (check out places like Tenerife or even Algarve, both on the Atlantic coast).
Vacation rentals are available across various types, from branded 5 Star hotels to home stays. What vacation rentals, , don’t provide is economic value that could be sold or a right to transfer (in most cases); and you pay for your shares, in advance. So, the time value of money is ridiculously low for the folks who sold those time shares to you. If you were to book these resorts in real time, you probably would find them to be much cheaper than what you have possibly paid, adjusted for time value.
And this is assuming you own the real estate. If you don’t, , there isn’t any upside from the property, no value appreciation; and possibility of you missing to use a few of your weeks over years; it’s all mostly bad, as there isn’t any compensation for those loses. To top it all up, you need to keep paying for annual maintenance and much more.
Therefore, at least for those who could afford, second homes or holiday homes were always more appealing. Holiday homes in idyllic locations could be used once or more every year, and became quite a rage, especially in the emerging markets over the last couple of decades. Higher disposable income and cheaper costs of ownership fuelled growth of a lifetime across markets like Lonavla, Aamby Valley, Shimla, Solan, Rishikesh, Mussoorie, Coorg and many more places in India. These are not to be confused with farmhouses, which are near cities, outside the municipal boundaries, or in no development zones. These second homes were built for purpose, with larger spaces (than what people were used to, in the cramped city) and loads of amenities (large private swimming pool is a must have). However, as these villas and beach homes started ageing, and got nearer to high density traffic as neighbourhoods densified; the cost of operations started pinching; so much so, that owners felt the need to open up these homes for strangers to come and enjoy and pay a bit for the same. Air B&B and other OTA’s helped the cause immensely as it allowed owners to monetise these assets better, and some ended up making a significant return, sometimes enough to actual build or buy more of such assets.
So if you are one of those who was able to ride the wave, you know what we are talking about. For the others, many of you would have gone and used one of these villas/ bungalows or beach homes over the last 1-2 years for a quick weekend gateway when hotels were shut or for longer staycations; and have wondered how to buy or get a piece of the action.
The monetisation through home stays have improved the cash flows of the owners, but operating high use properties, still costs quite a bit; especially if they were not designed for such high use, and sometimes abuse. Most booking agents and OTA platforms charge anywhere between 10-30% of the booking amount; additionally, costs of operations, maintenance, repairs and insurance eats away most of the good stuff from the earnings. In most sought-after destinations, home owners probably end up with 3-5% in yield (if property is valued at market prices), after sharing revenues with OTA and paying for operations. Still better but not really good enough.
Investments in Operating Hotel Units and Built to suit holiday homes for rental
This is the space where we find a near perfect mix of investment diversification, yields, appreciation and holiday usage. Let’s see why.
Purchase & Lease back of hotel or serviced apartment units as a concept, although sparsely used in India, has been highly successful across US and even south east Asia. You can easily find options of hotel units or serviced apartments being sold by developers, and leased back, and given to an operator to operate. Most such models provide 8-10% yields with additional free nights for stay and other non-monetizable economic benefits. You can use the nights for your holidays, so that you get to stay where you like; or you can give those nights as gifts to friends and family and earn income for the period its not being used. The operator ensures maintenance and upkeep throughout, and finally there is a possibility to sell the property with an upside, as the property prices increase; or there could be buy backs pre agreed with developer. Here asset ownership is rewarding due to lease rentals, and you also get timeshare to enjoy your property. In some cases, the owners get preferential rates, so, they can use their property for longer period than as agreed in timeshare by paying discounted rates, while they get lesser revenue in lease payments for such durations.
As per Savills research 85% of the sale and lease back of residential units is by branded hotels globally. Marriott International is the largest single player, with a market share of 31% among hoteliers across several schemes. Globally, USA is the biggest single country market comprising of 32% units in schemes, while Asia Pacific has 30% of such schemes of which China is the single biggest market with 7%. Europe, just ahead of MENA, represents 13% of the market.
Impact of Covid-19 & Rising potential in India for Holiday Rentals
Lockdowns and movement restrictions have made near home holidays quite in demand, places that you can drive down to in less than a few hours, and enjoy a relatively secluded property in an ambient holiday setting. WFH has made people keener to explore such holiday options, and that has brought staycations and workcations et all in vogue. You would have seen the weekend rush to your nearest holiday destination shot up in the last year. This demand upheaval is likely to remain as WFH will not go away and near city destinations are likely to see demand rising further as even large families start going out more often.
Blame it on the Covid, or otherwise, but people have started asking for more recreational time, and places that allow them to unwind and enjoy, with friends and family are going to see demand piling up. While hotels had a tough time due to the restrictions, the holiday rental market for villas and row houses and independent townhouses made merry in these times.
That brings us to the other option, the more sought after one, which is owning a ‘built to suit’ holiday rental home in a tourist destination. The typical second homes were built for self-use, and retrospectively transfigured or given as is, to guests, whereas the holiday rental homes are ‘built to suit’ for renting. As such these are a bit cheaper, sometimes of cookie cutter design, bit more congested and sold completely furnished. In some cases, these are leased back to developer who runs them as holiday rental under a separate brand name. The rise in this new trend has reignited the demand for sale and lease back, more on holiday rentals, but also in resort hotels, as they come out of covid restrictions.
As per Noesis Research, there is a potential of nearly 20,000 new rooms to come in the branded hotel segment in India. The market is largely spread across the top leisure destinations across India. In the first wave of development top states such as Maharashtra, Gujarat, Karnataka, Madhya Pradesh, Tamil Nadu, Rajasthan, Goa, Kerala, Uttarakhand, and Himachal Pradesh will witness the tranche of development focused towards the sale-lease back model.
With the varied tourism options within the country, India is truly poised to fully harness the power of sale and lease back, both for the developer, to reduce costs of debt for development and for the consumer, who gets a yield generating asset, that they can also use.
Why invest in Sale & Lease Back model for Branded Hotel Units or BTS Holiday Rentals ?
- Professionally managed, keeps your property maintained
- Yield generating from 8% to 13% per year (pre tax in the hands of the owner)
- Chance to also ride the upside on revenue share
- Enjoy your holidays, with 15-30 days available to owners in the property
- Avail other benefits such as spa, sports and golf
- Sell back to hotel owner for exit, at pre agreed terms
- Some branded hotel operators are now looking to lease holiday rentals as well
Key considerations for buyers looking to invest in Hotel units or Holiday rentals:
1. Property location & demand drivers: Majority people fail to study and end up investing without the knowledge of the market. Study of the property location, market demand, competition performance of the existing hotels in the vicinity, whether that destination caters to MICE and/ or is a wedding destination, are important aspects to be looked at prior to making your decision to invest.
2. Brand Value of the Operator: Branded hotel operator is likely to maintain the property up to its standards and gain more traction than a unbranded service provider. While buying Hotel units, its better to work with a branded operator who can drive customer as well as maintain the property better.
3. Clear title, other licenses, is it operational: Prior to making an investment, you should look at all the clearance certificates and licenses required to operate the property as a hotel or a B&B. Quality of diligence matters. Also assess the property status; operating or near operations, as against under construction projects. Operating assets may be comparatively expensive, but you don’t have to wait for the yield.
4. Ownership Structure: The buyer should have the clarity prior to making his investment, that although buyer is the owner, possession will remain with the developer or Operator till the tenure of the lease. Buyer will be allowed to use the property basis the terms and conditions agreed in the sale & lease contract.
5. Exit options: The buyer should have clarity on the resale rights of the property and should take full details from the developer prior to making investment. Its best to ensure a buyback agreement id in place with clear and enforceable terms of buy back, including timing and value.
6. Asset Managers: Asset Managers play a vital role in ensuring that the asset is maintained of the desired quality, revenue generated is timely distributed and coordinating with all – developer, operator and investor to provide assistance and resolve queries. If the investment is through a legal entity, its always best to seek a professional asset manager to be the intermediary between unit owners, developer and/or Hotel Operator.
How does Upcide.com help
Upcide identifies opportunities considering all the above elements to ensure the investor gets best of the returns, while investing in operating hotel units or built to suit holiday rental homes/ villas.
As we expect work from home to continue for a longer period post pandemic, the need for vacations and staycations are on the rise. This will increase the demand at leisure focused locations. If you are looking to invest in yield generating assets while enjoying the property of your own at times, consider investing in ‘sale & lease back’ model of branded hotels and holiday rentals, operated by operators with strong customer centricity.
To know more , Reach us on : Deals@upcide.com