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Domestic Tourism as a Source of Income. Investments in UK Out-of-Town Hotels

Domestic tourism has become one of the most attractive segments of the hospitality industry during and after the COVID-19 pandemic. At the same time, out-of-town hotel cottages turned out to be more attractive and profitable than hotel apartments. This tourism industry has existed in England for more than 100 years. Small, but luxurious villas are a priority for urban tourists. However, not only tourists are interested in them, but investors as well. Why? We looked into the details together with the expert Ekaterina Orlova.
Екатерина Орлова
Ekaterina Orlova, Intermark (Savills)

Below are 9 important facts by Ekaterina Orlova, Intermark Real Estate (Savills):

1. How Can You Buy While Outside of the UK

Many clients are looking for an opportunity to save a part of their real estate investment portfolio in Europe, while purchases in other countries are sometimes difficult without a foreign account. The popularity of cottages, is explained by, besides high guaranteed profitability, the fact that you can pay for them directly from your country.

The point is, that the British law has the features that allow for classifying this object as movable property, which opens up new opportunities for transactions under current conditions.

Please, contact our specialist for details. Feedback form at the bottom of this article.

This legal status of the cottages is what gives the opportunity to make payments from other countries, as the payment will not be limited. In addition, there are also no restrictions on the registration of a land plot, since leasehold is the traditional form of England's land ownership. The mix of factors such as guaranteed profitability, high quality construction with a 70-80-year service life, ten-year guarantee (as on all new buildings), tax benefits and the possibility of paying from abroad, makes this product extremely popular today.

2. Out-of-Town Hotels Main Advantage: They are focused on Domestic Tourism

Currently, an investor with a budget of up to 500 thousand dollars has several options: 1) to buy an apartment and rent it out for a long term, while receiving 4-5% per annum; 2) to buy a hotel-managed object that is focused on international or domestic tourism. Such objects already bring from 7% per annum (examples: apartments in Thailand, villas in Bali, duplexes in Brazil or cottages in England).

In my view, domestic tourism is the safest environment for an investor. Recreation is one of the basic needs, and domestic travelling is usually much cheaper and easier than travelling abroad. It is no wonder that the domestic tourism industry wins in any crisis. This is proved by the statistics of 2008-2009 and the last two years. The British are exploring their own country instead of spending from the family budget on foreign travel. This is also confirmed by Barclays bank analytics. According to their research, over 80% of tourists travel within England.

Savills

The success of the hotel is determined by the location and infrastructure. A traveller’s dream: there is plenty to do and see in the surrounding area within 30 minutes by car.

As an example, let's take our investment portfolio that includes a hotel in the North East of England near the beach town of Bridlington. The hotel is surrounded by the incredible Flamborough Cliffs and beaches, where all the tourists of Yorkshire gather. The occupancy rate of this location reaches 85–90% per year. Summer pictures will remind you of Sochi or Gelendzhik. There is also a hotel with its own 18-hole golf club, tennis courts, banquet hall, restaurant, bar and fishing lakes. This is the place you definitely want to stay.

In general, our developer strives to create maximum comfort in each hotel. Each hotel project necessarily includes a cinema, a gym and games rooms.

Consider other investment ideas. Click student residences.

3. Stably High Profitability

Profitability is 8% per annum for ten years. The investor takes the profit home. This amount already includes management, marketing, utilities, repairs and insurance costs. The management company pays for it, and terms are fixed in the contract.

In fact, each cottage generates 12-15% annually. These numbers are confirmed by the largest company with a 20-year experience in the domestic tourism market. It is not affiliated with the developer, so its data is objective. The developer's MC pays 8% to the investor, and retains the remaining 4-7%. The company's motivation is to maintain and increase these earnings, as well as to fulfil the terms of the contract. Otherwise, the investor may terminate it.

Many clients ask whether the current crisis and rising energy prices will affect the management company's ability to pay income to the investor. As mentioned previously, the crisis has a positive effect on occupancy in the domestic market, as fewer tourists travel outside the country. In addition, the payment for electric power is the responsibility of the hotel guests. They buy the required number of kilowatt-hours upon check-in. This is all due to the fact that hotels work on a self-service system. So, the MC and the investor are protected from high energy costs.

Savills

4. Both Institutional and Private Investors Are Interested In this sphere

Many people wonder why the developer sells cottages to private investors who are foreigners. Is it unable to find buyers in England?

The answer is that statistics speak for themselves. Foreigners managed to invest only in five projects of the 13 hotels in the developer's portfolio. The other ones were either retailed to the British investors, or entirely to institutional investors.

Sales to private investors are completely taken over by agencies like us, and deals with funds are handled by the developer himself. So, these are parallel processes for the developer. At the same time, work with private investors is somewhat more beneficial for the developer. After all, retail sales go faster than large transactions. In addition, funds usually want more than the 8% paid to private ones. Funds know a real profitability of 12-15% per annum.

Prices for private investors are affordable. The minimum offer price is £140,000, equal to the purchase of a 20 sq.m mini-cottage and a 60 sq.m land plot; lodges for couples with fenced yard, 4-poster bed, BBQ and jacuzzi.

Other offers are already larger: 32.5 sq.m. There is panoramic glazing, an additional bedroom on the second floor for children. Price range is from £155,000 to £160,000.

The new hotel for sale has large properties: 117 sq.m. for £210,000. This is a pretty good price per sq.m., which will increase significantly after the hotel renovation.

There are also proposals for large investors who are ready to invest from £3-5 million and buy an entire hotel or several cottages in different hotels.

Are you interested in UK property? Please, contact our specialist for details. Feedback form at the bottom of this article.

5. The Market Is NOT Big.

New projects rarely appear on the Market

Even despite the fact that the segment of out-of-town hotels has been around for a long time, it is relatively small. Over the 120 years of the tourism industry's existence, most popular resort areas have already been taken. I don't know a single developer who builds new facilities from scratch now. Mostly, existing tourist areas are being reconstructed: common areas are being updated and new cottages are placed, if possible. Later, they are rented out as rooms on two aggregator sites for finding vacation rentals. They are owned by large MCs that cover about 90% of the market and have been working on it for decades. Some offers are also placed on Booking and AirBnb, which are more familiar to us.

The market is also divided among large developers who own 10–20 hotels at once. Of course, there are out-of-town hotels that are owned by individual families handing down the business from generation to generation. However, such project management is saturated with a parochial mentality.

The market is growing, but the rate of growth is slow. This means that the market cannot satisfy all the needs of the growing population. Once again, we emphasize that there are very few such hotels, and the cottages themselves are oriented towards a class slightly above average. And this is the widest layer of society in the UK.

Savills

6. Big Shots Create New Offers

Big players make money. I am often asked why the developer does not take a bank loan at a low interest rate. Why would he pay 8% to investors?

The reason is simple: he earns not as a rentier receiving rental income, but as a developer. The margin of such a business is much higher.

Any owner may have problems, then he puts up the object for sale. Being well-connected thanks to 60-years market experience, developers buy out the objects, attracting up to 70% of the cost at 3% per annum in the bank.

Here's the redevelopment: either they build something new, or they are engaged in the renovation of existing cottages. Then they are sold to investors for a higher price. Part of the earned money goes to the area and infrastructure improvement (ex.: gyms, cinemas, game rooms). As a result, the total cost of the project increases.

Thus, the developer earned 100% on equity. Perhaps he can scale his business model in a year or one and half years. If he had simply taken out a bank loan and not sold cottages to investors with a 12–15% profitability per annum, he would only have returned the invested capital (30% of the price) in two years. The benefits of the developer’s business model are clear to see.

7.  The Main Investment Risk Is the Hotel Business Nature

We know that the higher the profitability, the higher the risk when investing. You cannot do without risks in an investment that brings 12-15% per annum. They are related to the hotel business nature and are divided into two types: hotel equipment and its marketing.

Equipment includes both a greater number of conveniences compared to competitors, and the hotel appearance maintained. It is important to make renovation on time, because cottages wear out quickly when renting out for a short time. Some businesses ignore the need to stop bookings for repairs in chase of quick returns. As a result – bad reviews and lost guests.

From a marketing point of view, it is important to give the highest visibility to properties on UK aggregator sites, as well as to get the right price on AirBnb and Booking. It is difficult to overestimate the importance of the MC’s actions in managing such risks.

That is why we are working with a developer whose facilities are managed by the largest operator with a 20-year history and more than 20,000 properties in the portfolio. A few years ago, they invested about £10 million in their own software, which allows them to predict the correct rates per night and occupancy depending on the season, holidays and school holidays using the accumulated volumes of big data. Also, this MC has its own aggregator website, which is already promoted among the British. Locals are more likely to book there than on AirBnb.

Savills

8. Prices Are Rising Steadily.

It's EASY to sell the cottage if necessary

The investor receives a certificate from the land cadastre for the leasehold of the land plot for 250 years and a contract for the object upon purchase. In this way, the investor has full control over when and for how much to sell the cottage (as with any property).

We offer you to sell the object purchased with our help. It is optimal to put up a cottage for £5 thousand cheaper than the developer offers for a quick sale. We have a wide customer base and we will be able to sell it in less than a month. You can also use the help of local real estate agencies to place the object on British aggregator sites (Cyan.ru analogues).

9. Taxation Depends On the Owner's Tax Jurisdiction

The progressive taxation scheme for individuals and the first £12,570 of annual income are not taxed in the UK. Therefore, our clients often make out one cottage per adult family member (each member will keep this tax deduction). Next, you need to look at the tax residence of the owner and the DTT (Double Taxation Treaty) between countries to determine the tax.

It is also possible to purchase the UK facilities by registering it with a company. The company can be registered in any country. In this case, the tax will amount to 19%, but only on the taxable base. It can be reduced by issuing a loan from the beneficiary to the company or by taking advantage of the tax deduction, which we discussed earlier. It is especially profitable to register objects for companies in Cyprus or the UAE. As a rule, we help our clients to properly structure the transaction by involving professional tax advisors.

Photos provided by Intermark Real Estate (Savills)

Quoting conditions of Prian.info materials

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Tags: United Kingdom, Market Analysis, Investment, Commercial real estate, Real Estate

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