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Use REITs for an exposure in the bustling hospitality sector

Hospitality REITs operate similarly to traditional REITs, aiming to generate rental income and distribute profits to shareholders.
Last Updated : 01 July 2024, 02:14 IST

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The hospitality industry is a cornerstone of the global economy, drawing in millions of travellers each year. For investors, this sector offers lucrative opportunities, but direct investment in hotel properties can be challenging due to the complexities of management and significant capital requirements. Investing in hospitality REITs allows you to participate in the success of the global travel and lodging market, all while enjoying the convenience and benefits of a well-managed, diversified portfolio.

A primer

Hospitality REITs operate similarly to traditional REITs, aiming to generate rental income and distribute profits to shareholders. However, unlike traditional REITs, hospitality REITs primarily earn revenue from hotel operations, including room rentals, food and beverage sales, conference services, and other related activities.

Revenue for hotel REITs comes mainly from guest payments for short-term stays and facility usage. By law, these REITs must distribute at least 90% of their net revenue as dividends to shareholders.

Investing in hospitality REITs requires understanding that their income is closely linked to travel demand, occupancy rates, and average daily room rates.

Essential metrics

It’s crucial to understand investment strategy and key performance indicators for investors considering investments in hospitality REITs.  Some of the key metrics are, 

Occupancy rate: The occupancy rate measures the percentage of occupied rooms out of the total available. High rates indicate strong demand and potential for higher revenue, while low rates may signal lower income and challenges in covering expenses and providing returns.

Average daily rate (ADR): The ADR represents the average revenue earned per occupied room per day. It helps assess the financial performance of a property.

Revenue per available room: This combines ADR and occupancy rate to evaluate a property’s ability to generate income from its available rooms.

3d rendering interior and exterior design
3d rendering interior and exterior design

By Special Arrangement

Additional considerations

Technology integration: Properties utilising technology can benefit from improved operational efficiency, enhanced guest experiences, and better financial performance. Automation in reservations, check-ins, and housekeeping can streamline operations and reduce costs.

Sustainability initiatives: Implementing sustainable practices can lead to cost savings and enhance brand reputation. Energy-efficient technologies, waste reduction, and water conservation measures not only reduce expenses but also attract environmentally-conscious guests.

Property portfolio: A diversified property portfolio can mitigate economic risks and indicate potential revenue streams. Assessing the portfolio helps gauge the risk and revenue potential.

Management team: The expertise and experience of the management team are crucial for the financial success and long-term performance of the REIT. A capable management team can effectively handle industry challenges and optimise shareholder value.

The strategic benefits

The hospitality industry presents a wealth of opportunities for investors. By acquiring shares in these trusts, investors can enrich their portfolios with various exquisite properties – like luxurious hotels and resorts. This would reduce the risks associated with depending on the performance of a single property. Additionally, the REITs provide a reliable stream of income through rental avenues which are expertly managed by real estate professionals who ensure the highest standards of oversight and operational excellence.

When it comes to capital growth, hospitality REITs hold tremendous potential. Fuelled with ongoing renovations and strategic acquisitions that elevate the value of assets, property values are set to rise over time. This makes the investment avenue particularly appealing for those eager to engage with the hotel industry without the burdens of direct property ownership and management.  Consequently, by carefully evaluating their options, investors can use hospitality REITs as a smart way to enter the profitable and growing hospitality sector.

(The writer is CEO and Director, Axis Ecorp)

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Published 01 July 2024, 02:14 IST

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