The news that InterContinental plans to sell off its remaining hotels is expected to attract a “fierce auction”, as The Daily Telegraph puts it, with private-equity firms keen to get into the hotel business. And for private investors who fancy the idea of getting exposure to the trade as well, self-invested personal pension (Sipps) providers are offering the chance to put a hotel room into your pension. Although Gordon Brown’s A-day U-turn last year means that residential property is not eligible for a Sipp, providers such as FreedomSIPP are offering hotel rooms as an alternative – the group has already sold several rooms in the French ski resort of La Plagne.
Hotel investments: are they eligible for Sipps?
However, there is debate over whether hotel rooms are really eligible. The distinction comes down to whether a property is commercial or residential – and hotels fall into a grey area. FreedomSIPP’s director, John Fox, argues that as long as rooms have shared facilities, such as a restaurant and reception, they are commercial. But Christine Hallett, director of PY Sipp Solutions, says that many rooms are actually ski chalets and “ski chalets are not commercial; they are residential and therefore would be taxable at the full rate”. That could mean paying a tax bill as high as 80%: 40% income tax and 15%-40% in ‘scheme sanction’ charges. But although the Government seems reluctant to clarify the status of hotel investments, the industry itself appears to have decided that they are commercial as long as the investor doesn’t have “rights over a single room”, says Kathryn Cooper in The Sunday Times. This means that schemes such as GuestInvest, where investors own a room and receive 50% of the revenue, are acceptable as long as they waive the right to stay in the room.
Hotel investments: more than a fad?
But even if hotel rooms are eligible for a Sipp, are they worth investing in? The answer has to be no. These schemes are in their infancy in the UK, but are well established in the US, where one downside is becoming clear. A “resale glut is likely”, says Forbes, as lots of ‘condo-hotels’ have sprung up in specific areas such as Las Vegas. Maintenance fees are another potential minefield. For example, an investor with GuestInvest has to pay a service charge of around £500 a year for the first seven years, but it could “really bite thereafter”, says The Independent on Sunday’s Esther Shaw, as refurbishment costs will become an issue.
Then there’s the question of occupancy. GuestInvest guarantees a 6% return in the first year, but after that you are reliant on people staying in your room. Dean Ader, one of the first to get in on the idea in America, warns in Forbes that while he expected to earn $2,000 a month, he sometimes got as little as $425. Many investors complain that the hotels aren’t marketed successfully and at one hotel, the MGM Mirage Signature, rooms were let for vastly discounted rates of $90 a night, rather than the rate of $200 on which investors had based their return calculations. Forbes reckons it is only a matter of time before the first lawsuit is launched.
And this all leads on to the greatest problem. “It’s a fashion fad, and fashion fads can turn into next year’s tank top,” says Justin Urquart Stewart of Seven Investment Management in The Guardian. Once the craze has blown over, who’s going to want your hotel room?