Booming Hotel Sector or Reality – Which should you invest in?

I was reading an interesting article the other day:

Here’s the link:

The gist was this.

That the commercial property market was at a high as of 4th quarter last year. The highest confidence being in hotels.

The attribute this to a suppressed Aussie dollar bringing in more tourists and there being a shortage of rooms…

Second highest being in offices.

Industrial being weakest…

Retail was somewhere in the middle.

They said retail was lower because, they said “Sentiment in the retail property sector was also low, but improved slightly over the quarter, amid concerns household spending may falter as growth in house prices slows.”

I really feel that this is a gross oversimplification in terms of useable information.

Why?

Because you could be led into thinking that retail wasn’t a good idea to get into for those reasons…

But are people all of a sudden going to stop drinking alcohol, getting haircuts, and having coffee?

No – of course not.

I’m thinking that investing in property that caters for everyday services for everyday Aussies is a much safer bet than speculating on hotels because the AUD is down…

Yes, there may be a shortage of rooms right now but if you get a bunch of developers building new accommodation, and the Aussie dollar rises again… suddenly we’ve got a glut of empty rooms.

That’s happened before – it happened as soon as the Aussie dollar started to rise sharply against the US dollar a few years back.

Then there’s the location issue.

Where is your retail shop going to be?

That could make a huge difference to how stable your tenants businesses are. Some places are just busier than others.

The same goes for accommodation. I own a bunch of holiday accommodation… but it’s in an area where the demand has been not only stable but increasing for the last 20 years.

The risk is that if you forget the fundamentals and take to listening to these generalisations, then you may end up speculating on property.

And that’s gambling.

If you are speculating on which “Hot Spot” is going to take off next… what’s the difference between that, and speculating on which industry is going to take off next?

What you need to remember is that you can go against these so called trends if you have the fundamentals right…

But if you don’t have those basics worked out, trending market sentiment won’t necessarily get you over the line.

It is a ‘sentiment’ after all, not a hard fact.

You all know how much I love surfing… well imagine trying to surf a wave on an old scaffolding plank… I’ll bet someone can do it… but he’ll still be dragging his behind in the water most of the time.

Remember, Australia is a big place comprising many smaller markets.
Even, state by state, there can be a big difference in different towns and areas.

The other thing that is critically important is this. You can have two properties in the same state, in the same town, in the same street and they can be quite different opportunities.

At the end of the article they predict the following:

“Respondents (in a survey) considered CBD hotels will deliver the best capital returns over the next one to two years, of around 4 per cent annually.

The office sector, where property yields are tightening, was expected to deliver 1 per cent and then 1.2 per cent capital returns over the next two years.”

That’s all well and good, but there are ways to create massive capital growth in a matter of months… even weeks, that will leave those capital returns for dead.

Not to sound like a broken gramophone (am I showing my age?)

If you don’t understand the opportunities available to you in the commercial sector, then you are going to be missing out…

…even if you buy a hotel in the Melbourne or Sydney CBD.

Recently one student did a deal that created 1.4Million dollars of capital growth (read: 46%) in a matter of around 12 months.

Now I know it’s been a while since I did my maths VCE, but 46 is still bigger than 4 last time I checked.

That capital growth was no accident. It came down to choosing the right property, with the right fundamentals, and applying the right strategies to the deal.

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