Should You Invest in Luxury or Budget Hotels? 5 Things to Consider. If you have the fund to set aside and interested in investing it to hotels, consider carefully first whether you want to invest in which kind of hotel: Luxury or Budget hotels.
Differences Services Between Luxury and Budget Hotels
First let’s define what are luxury and budget hotels and see the difference. The difference then will set the characters that you may consider in your investment.
Luxury hotels are those that offer quite a number of amenities. There are room service, ironing and dry cleaning, and a concierge service. Pools, spa, bars, restaurants, gyms are common to be found in luxury hotels. The staff are trained carefully to be responsive, professional, courteous, and responsible. Luxury hotel suites usually offer bigger beds, as well as dining and living areas, and even kitchenettes. And for those small differences above, visitors would pay larger dollar signs and making faster revenue streams from paid services.
On the other hand, budget hotels are limited in their offers. You will get lucky if you can get one with a pool and a gym. Usually, they only offer one of those. Most budget hotels nowadays will give you bathroom amenities, but that’s it. Other than that, you have to go out of the hotel to get it yourself.
Laundry? Maybe. But the hotel may inform you that the hotel would subcontract it to outside parties. It means that your clothes might just get lost along the way. Well, of course it is not that bad.
Budget hotels is cheap obviously, for a reason. Your facilities may be poorly maintained, smelly, unclean, sub standard furniture and air conditioning system. Although budget hotel operators now are trying hard to fight this perspective, but for the most part, this idiom stands: something has to go for that kind of price.
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Which Hotels to Invest: Luxury or Budget Hotels?
While it is obvious if you are a visitor that you want to match your budget to your choice of hotels, the hotel investment would not be so easy. The fund required for the investment may just be the same, but there will be different direction for your return.
Take a look at 2020 stock price of Indonesian hotel operating companies. The deepest dive in the stock price was experienced by the most luxurious hotel of all: The Hermitage. Its revenues were cut into half and its profit was cut even more.
Why? Well it is related to the services offered above. To offer excellent services, they have to train people for a longer period of time, giving them better salary and allowance to keep them from going to other hotels.
They also have to invest in inventories of food and drinks that are not very durable. They also have to invest in quality products, like air conditioning system and even high-end beds and sheets. It means that you need to set aside a significantly larger funds that if you want to invest in budget hotels upfront.
You also want to invest heavily into marketing and promotion to make sure you room occupancy rate is sufficiently high to cover for operating costs and eventually your investment.
All and all, Indonesian average room occupancy rate over the years for starred-hotels were below 60%, not including 2020 with its pandemic situation. The higher the star is, the lower the rate. It means that you need to calculate diligently whether the occupancy rate, the room price and your costs are matched.
Luxury hotels, more than budget hotels, are very cyclical. It means that in certain periods you will enjoy more than 90% of occupancy rate. This is called high season, like in summer holidays or school holidays. But for most part of the year, it will be low season. Most luxury hotels put out discounts on their room just to attain better occupancy rate and cover their operating costs.
Budget hotels are more stable, historically. The reason is clear. They target middle class economy that is of course occupy a larger part in the population. It is even bigger now with all the infrastructure development, making it a significant target for hotels.
This being said, several ultra-luxurious hotels enjoy all year round 100% occupancy rate. People even have to get in line to stay in their rooms. This of course a strategy to be considered if you want to invest in luxury hotels. This rely on the number of high net worth individuals that are looking to spend their money for comfort and improve their position in the eyes of their peers.
4 Things to Consider Before You Decide on Your Investment
Therefore, there are five things to consider if you want to choose between luxury and budget hotels for your investments:
- Your investment size
- Your risk tolerance
- Your time horizon
- The location
- The target market
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