Aparthotels: Investment pros and cons

Aparthotels (apartment hotels) offer users value for money and flexibility, and interested investors should investigate the asset viability and projected returns.

Carlo Mariani

Safrea Chronicle reader, Solly, asks: Is buying into aparthotels a good idea, especially for a new property investor?

“For travellers and tourists, this makes perfect sense. However, this type of investment may not suit starter property investors,” says Carlo Mariani, founder at ThePropertyCoach.

Aparthotels are definitely not an ideal starting point for new property investors. This is due to the generally lacklustre returns, especially when it comes to capital growth when relative to the level of high-risk, inherent to the leisure and travel industry,” he says.

Mariani says that buying in aparthotels has its pros and cons, and investors need to conduct due diligence before investing. The following pros and cons will help investors to make informed decisions.

Pros and cons of aparthotels

ProsCons
It’s an investment in the hospitality and tourism sector that will recover once Covid-19 is behind us. Demand for experiential travel will increase, and the early signs are already quite evident overseas.  The liquidity of the investment is often limited. If and when an investor wants to sell such an investment, they might find it difficult – largely due to the fact that they are limited to selling the unit to other investors (those who wish to live full-time in an aparthotel). Additionally, the investor is shut out from the much larger owner–occupier buyers’ market.
Investing in aparthotels is as passive as property investment can get, probably only short of investing in JSE-Real Estate Investment Trusts. This will attract investors with a low inclination to get involved with the nuts and bolts of property ownership.Guaranteed income might not be as guaranteed as was initially thought. During tough times such as the current pandemic, many schemes simply did not pay out any income to investors.  
Hotel apartment schemes often provide guaranteed income, enabling investors to plan their cash flow in a predictable manner, especially if the investor is looking to raise a bond to finance the asset. This will appeal to the more ‘risk averse’ investors.The duration of the guaranteed income might be too short, leaving the investor in trouble after a couple of years.  
Depending on the structure of the rental pool scheme, an investor should benefit from the strong demand for this type of accommodation.  An investor must ensure a good understanding of the aparthotels’ fine print. Many rental pool schemes and leasebacks are often biased towards the rental pool operator, rather than the owner of the unit(s).
The apartment can be used for personal living in a flexible manner, so investors can enjoy the lifestyle without the costs of long-term vacancies.Investors need to ask questions such as: “Will bonds finance the purchase, and at what loan-to-value?” It’s highly unlikely to get a 100% bond on this type of investment property.
Scheme operators generally have strong marketing skills to drive bookings, thus investors don’t have to worry about filling vacancies every week.  With aparthotels investments, investors need to ask if they are enjoying full title deeds rights, or fractional ownership? The two are not the same. Fractional ownership should be viewed more as a lifestyle purchase rather than an outright investment.

Mariani says that when working out the investment numbers, investors should check to see if maintenance and repair costs have been fully considered in the contract.

He recalls his mentor saying: “When you see glossy brochures and fancy offices, always run for the exit door before you make a mistake.”

According to Mariani, before making a decision on any investment, it is crucial to empower oneself. Find out more about the local and practical aspects of property investing and do not just rely on information provided in brochures.

Read also: Six tips for first-time property buyers

“With aparthotels, don’t confuse what you like as an idea of a holiday with the basics of a solid investment property.”

Mariani adds that various low-risk investment strategies are available by tapping into the supply and demand gap that exists in the larger metro areas. Properties priced below R1m offer good value for money for savvy investors.

Read also: Can I Airbnb in a complex?

Do you have a question on property investments for our experts? Email infoaroundtheblock@gmail.com or post on the comment box.

Edited by Gudrun Kaiser

Author

4 Responses

  1. Thank you Denise for the deeply analysis that you have done on aparthotel as I have already started to market that option to my foreign home buyers or investors.
    The good success of that depend effectively on the tourism activities.
    Borders closures and others restrictions jeopardize such investment.
    The different rights and regulations should also be well known and understood before adventuring in it.
    Great article indeed.
    Bravo

  2. Seems like a clever thing to do. I shall give it a miss because my priority is finding a burial plot in a good location and with a good view. I must have a good view because I’ll likely be there soon and for eternity or until the resurrection. Whichever comes first. Actually, my plan is to live forever, so perhaps I will look at Aparthotels after all.

    1. When you find that burial plot with views, please let me know, it would make for an interesting article. The way I see it, you will be here for a long time, so best you do thorough research then buy into aparthotels, good luck.

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