Risky Deals? Landmark Welsh Hotels Sold Room by Room to Investors
Tenby’s prominent Carmarthen Bay Hotel , looking out to sea from above North Beach, changed hands earlier this year and had its name altered to the Fourcroft Hotel. The Osborne family, after operating the hotel for more than 70 years, sold to Northern Powerhouse Developments for an undisclosed sum.
What’s the story? It’s not a traditional purchase, one hospitality firm buying a going concern hotel from another. Northern Powerhouse Developments is very different. It acquires hotels and sells individual rooms to investors on long leases such as 125 years. A sister company like Giant Hospitality Ltd leases each room back for 10 years, typically, and promises to pay specific rental amounts to each investor.
Room-by-room investments are now widely marketed in the UK. A brand called Emerging Developments, for example, advertised investments in the Fourcroft like this:
- “Operational 40 room hotel in Tenby with sea views
- Full refurbishment to bring up to stunning 4 star modern standards
- 23 rooms have sea views
- Full suite prices from just £60,000 (with the option of just £54,000 total cash input)
- All rooms to be finished with sumptuous décor and high quality furnishings
- 10% NET return for 10 years
- 125% buyback option in year 10 (or the option to extend the 10% for another 5 years, or take a 50/50 room revenue split)
- 2 weeks free usage in your room each year”
Booking a room at the Fourcroft cost from £101 a night on Trip Adviser in October 2017, but anyone who invested £60,000 in the room would expect £6,000 a year for ten years plus £75,000 buy-back — working out at £13,500 a year. The funding model, based on avoiding bank loans, means there may be no bank interest. This increases the profit potentially available to pay investors. If the hotel is so brilliant that it can charge top room rates, yes there could be more profit – but top hotels are labour-intensive and have correspondingly higher salary costs.
How safe is this type of sale and leaseback ‘alternative investment’? It depends on the success of the hotel, but the promised returns require business to be booming. All the time.
The sale of hotel rooms is unregulated, so investors take all the risk.
Northern Powerhouse also acquired, in 2016, Caer Rhun Hall in the Conwy Valley of north Wales, and set about selling the 23 planned bedrooms, and then 42 rooms in an annexe and 6 in a cottage. The hall was an accountancy school and also a wedding venue. Conwy Borough Council agreed change of use to a country house hotel on August 9 2017. Of course, it would have been tough on investors if the council had refused.
Investors are told in a marketing brochure from Select Portfolio, a firm of agents: “Offering a choice of single, double/twin and premium accommodation, the hotel delivers an annual rental income of circa 10% net of the purchase price for 10 years, with 2 weeks personal use included each year and units starting from £75,000, ranging up to £180,000.”
Northern Powerhouse is also behind the Afan Valley Adventure Resort at Caerau, Cymmer, north of Maesteg, and Select Portfolio sells lodges there. The four-bedroom ‘lodge 20’ is £249,000 and ‘lodge 33’, also four bedrooms, is £259,000. That’s a great deal more than a timber lodge would cost from the manufacturers – probably between three and four times more, for a lodge constructed and insulated well enough for year-round occupation.
The concept is a form of crowd funding. Investors’ money pays for building conversion and new development, on the promise of receiving operating income for the next decade or so. But if the hotels and resorts are not popular, there may not be enough income to pay to investors.
This is a sales proposition for Caer Rhun Hall: instead of paying £111,000 for a premium double room (including £1,000 reservation fee), pay £87,000 and go without income for two years. The target income for the next eight years is £88,000, and then Northern Powerhouse would buy it back for the full purchase price plus 25%, £137,500. In a typical scenario, it is hard to see how one room can generate, reliably, a surplus of £11,000 a year (especially as the investor has the right to use it for up to two weeks a year). And then there’s the commitment to buy it back for 25% more than the purchase price.
Given a typical hotel occupancy rate of 75%-80%, the room would be occupied for 274 to 292 nights. Trip Adviser on October 23 had a double room – not necessarily an official premium room –at Caer Rhun available for £68, which times 274 is £18,632 and times 292 is £19,856. This is not profit, of course. At 7%, the net profit could be £1,304 to £1,390, at 15% £2,795 to £2,978. Respectable, but not sufficient to pay giddy amounts to investors.
Northern Powerhouse Developments currently has a portfolio of six hotels in England, and seven in Wales. The Wales collection is:
- Afan Valley Adventure Resort, Caerau, Cymmer
- Belmont, Llandudno
- Caer Rhun Hall, Conwy (to be joined by a large annexe, and lodges)
- Fishguard Bay Hotel, Goodwick
- Fourcroft Hotel, Tenby (previously the Carmarthen Bay Hotel)
- Llandudno Bay Hotel, Llandudno
- The Queens Hotel, Llandudno
The three Llandudno hotels, the Fishguard Bay and the Fourcroft, and Caer Rhun Hall are all trading. The Afan Valley Adventure Resort, and the annexe and lodges at Caer Rhun, are in development.
On its website, Northern Powerhouse Developments explains its funding formula:
“The group is funded utilising a tailored funding mechanism known as sale and lease back. The business operates an op co (operational company) prop co (property company) business model. In its most simplistic form the prop co provides individuals the opportunity to buy a room in the hotel and then rent the hotel room back to the hotel operator. This is an alternative to the residential buy-to-let market.
We sell our properties through a global network of sales agents who offer private and institutional buyers the opportunity to buy individual rooms, multiple rooms or whole developments within a given project.
Our team welcomes enquiries from agents, Financial Advisors, Fund managers, UK and overseas estate agents, wealth coaches or property networks.”
Targeting buy-to-let investors is logical because of ex-Chancellor George Osborne’s fiscal attack on buy-to-let landlords, whom he appeared to blame for removing homes from the reach of first-time buyers. From April 2016 there has been a 3% stamp duty surcharge on properties bought to let out. By 2020 landlords will not be able to count any mortgage interest as a business cost. April 2020 is also the time when all privately rented homes must have an Energy Performance Certificate rating of E or better.
George Osborne’s actions to discourage buy-to-let investment have led to savings looking for investment options. Student accommodation, hotel suites, and rooms in care homes are all now marketed as investment opportunities. In these cases, and unlike whole freehold properties, there is no established resale market.
Northern Powerhouse’s model is a form of fractional investment. Not fractions of rooms, as so disastrously at The Corran, Laugharne, but fractions of hotels. Does Northern Powerhouse Developments have a track record to inspire confidence?
Not yet. The company was incorporated on January 7 2016, and is controlled by Mr Gavin Lee Woodhouse, born in March 1978 and so currently aged 39. He also controls Northern Powerhouse Developments (Holdings) Ltd, incorporated on September 30 2016, and several other companies recently formed, none of which have had time to establish a track record.
Northern Powerhouse Developments Ltd’s first accounts, for January 7 2016 to March 31 2017, are available, and show that the company lost £171,635. In addition, although it is owed £3,717,663 by 13 other companies controlled by Mr Woodhouse, it itself owes £4,663,866 to 11 other companies in the expansive Woodhouse portfolio.
We asked both Northern Powerhouse Developments, and Select Portfolio, a firm in Dorset selling the rooms to the public, about their policies for warning novice investors about the risks involved, but have not received replies.
The team assembled to build the business is large and impressive. The operational board of six, chaired by Gavin Woodhouse, includes corporate banker Andrew Kitchingman; the former managing director of Center Parcs, Peter Moore OBE; and Richard Lewis, former CEO of Landmark Hotels in Dubai. If all these business heavyweights have confidence in the funding model, why question it? It could be that super-rich international investors will be attracted to the idea of buying up established hotels in not-particularly-fashionable locations (that’s one of Northern Powerhouse’s key concepts) and building activity-focused resorts (there is a tie-up with the Bear Grylls Survival Academy for the Afan resort plans).
But medium-scale investors with tens of thousands of £s in search of reliable returns, and not £ millions, please be very careful.