If you’re an entrepreneur, seasoned investor, or work in hospitality and have some money to spare, you might wonder whether investing in the hospitality industry could be a lucrative strategy.
It’s an in-demand industry, with the global market forecast to grow from around 5.5 trillion US dollars in 2024 to over 11.6 trillion US dollars in 2029. Domestic and foreign travel are also returning to pre-pandemic levels, with the number of people looking to book trips to global destinations showing no sign of slowing. These predictions suggest there are good returns to be made by those who invest wisely.
With that in mind, let’s explore some of the basics of hospitality investment and explore the foundations of a successful investment strategy.
What is an investment in the hospitality industry?
Hospitality investment is the process of buying and selling shares, properties, or businesses in the hospitality industry with the aim of making a financial return. That return could come in the form of dividends, rental income, and/or capital gain, depending on your strategy.
The hospitality industry is vast and diverse, with the main sectors including:
- Travel and tourism
- Accommodation
- Food and beverage
- Entertainment and recreation
There are many prospective investment areas to choose from, whether in bars, restaurants, hotels, or casinos. For example, the hotel sector alone has global chains, such as Marriott International, Hilton Worldwide, and IHG Hotels and Resorts. There are also many domestic chains operating in developed and developing economies. Then there are the many thousands of owner-operated hotels around the world. You could choose to invest in a hotel that already exists, buy shares in a hotel chain, or develop your own hospitality business from the ground up.
What types of investment can you make in the hospitality industry?
There is an investment strategy to suit every budget, skill set, and attitude towards risk. Here are some of your main options.
Full ownership
The most expensive and high-risk investment is to buy an existing hospitality business or develop your own. Whether you run the business yourself or appoint a manager, you will have complete control of its operations, marketing, and branding. This approach will require hospitality expertise, hotel management skills, and is best suited to investors with significant experience in the industry.
This type of investment is high risk, because if the business fails, you could lose all the money you put in. But on the other hand, if it’s a success, you can make excellent long-term returns.
Another advantage is the wide range of choice. You can choose the type of business that you feel most comfortable and inspired running, such as a restaurant, Swiss ski resort, or a luxury or lifestyle hotel.
If you’re tempted by this idea, check out this hotel investment guide.
Hospitality funds
If you don’t have the budget or are averse to the risk associated with the full ownership of a hospitality business, you could invest in a property fund.
Property funds are collective schemes where you pool your capital with other investors to invest in the desired asset, which in this case, is hospitality businesses. If the portfolio performs well, you receive a return on your investment in the form of dividend income and capital appreciation. As the value of your initial investment is less and your money is invested in multiple businesses, the overall risks are typically lower.
Real estate investment trusts (REITs) are a common form of property fund, and hospitality-specific REITs do exist, with their own particular advantages and risks. Although REITs are not issued in every country, they are traded on stock exchanges worldwide. If a country does not issue REITs, it will have equivalents, such as mutual funds and exchange-traded funds (ETFs), that make this type of investment accessible.
Hospitality and hotel stocks
Investing in hospitality stocks is an option for anyone, regardless of their budget. If you’re interested in hotels, you can buy stocks in everything from smaller regional operators to the world’s biggest hotel chains. By way of a return, you will receive a dividend payment or a capital gain if the profits are reinvested.
The risks associated with buying an individual hospitality stock are quite high. However, you can diversify your investment by putting smaller amounts into several stocks. That way, if one hospitality business underperforms, you still have others that can produce a return.
What is a good return on a hospitality investment?
Every investor has their own idea of what constitutes a good return. In the hospitality industry, the return on investment (ROI) differs from country to country and city to city.
Generally, investments that generate the best returns also carry the greatest risks. An example of a high-risk investment that could produce excellent returns is putting your money into a new hotel in a developing economy. Lower-risk investments, such as investing in an established hotel chain in a developed economy, tend to produce more stable returns.
Most established hospitality investors would be happy with an ROI of between 6 and 12% per annum. However, at a base level, taking more money out than you put in - when adjusted for inflation - is a positive result.
Hospitality investment strategies: Things to consider
Research the company
Before you part with your money, conduct thorough research into the performance and financial health of the business. Here is a checklist for assessing hospitality properties:
- Financial performance: Look at past and current financial data to see whether revenues and profit margins are strong and improving. You should also consider the company’s stock market performance and research what industry analysts say about its prospects.
- Market trends: What are the trends in the particular sector and is the business set up to capitalize on them? For example, sustainability is becoming a significant trend in the hotel sector. Is that something the company offers now or is targeting in the future?
- Location: Location is a critical factor in the success of hospitality firms. Hotels that are close to attractions, business centers, airports, and stadiums typically benefit from steady occupancy rates and guests who pay more for convenience.
- Brand and reputation: Is the brand well thought of in the industry? Online reviews are a good source of information about customer satisfaction rates. Lower scores can lead to fewer reservations and reduced profits.
Consider the market conditions
The hospitality industry is highly susceptible to changes in the market and the global economy. The most obvious recent example is the pandemic, which brought international and domestic travel to a standstill. Other market influences, such as China’s looming real estate crisis, also influence market conditions.
However, more subtle changes, such as switching customer preferences and increasing competition, all have an effect. In recent years, the number of people traveling solo has increased. That could mean hotels with lots of single rooms are well placed. Seasonality can also have a major impact on the hospitality industry, so you should be aware of the extent of the seasonal impact and consider investing in businesses with year-round appeal.
Diversify to reduce your risk
There’s no such thing as a risk-free investment, but you can reduce the risk by diversifying your investment as much as possible. For example, if you want to own or co-own a hotel, choose one with multiple revenue streams such as an established on-site restaurant, gym, spa, meeting spaces, and parking. That way, if one income stream falters, there are others to keep the business afloat. Similarly, rather than putting all your money in a single stock, buying shares in three or four businesses will ensure you don’t have all your eggs in one basket.
Is hospitality a good investment?
Investing in the hospitality industry can provide long-term financial returns. However, as with any investment, you must think it through carefully and research the market, consumer preferences, and the company’s financial standing before you part with your cash.
If you’re interested in hospitality but are not sure whether investing is for you, why not consider
a career in hospitality or hotel management instead?
