HOLIDAY HOMES TURN A PROFIT TOO

Reprinted from the Financial Times
By Lauren Foster in New York
Published: September 2 2003 21:34

Miami, South Florida, is home to Cuban exiles, college kids on break, pastel retirement houses and a rising number of condominium-hotels. Increasingly owners tired of boarding up their holiday homes for most of the year are turning to condo-hotels in the area.

The concept is popular - particularly in seasonal resort areas such as South Florida and Colorado - as it allows owners to generate income by renting out their units as hotel rooms when they are not using them.

“We are seeing more and more people contacting us and we are meeting with more buyers this month than any previous month,” said Joel Greene, vice-president of Sheldon Greene & Associates, a real estate and mortgage broker in Miami.

Several condo-hotels have opened their doors in recent years, including The Mutiny and The Trump International Sonesta Beach Resort, and more developments are under way.

“Condo-hotels have recently resurfaced as a development trend,” said Anwar Elgonemy, an associate at Jones Lang LaSalle Hotels, a hotel investment advisory. “Everything residential now has the Midas touch to it. The recent decline in the hotel industry has left hotel owners with excessive capacity so the condo-hotel model alleviates many of these problems.”

Condo-hotels are a hybrid between investment and second-home properties, Mr Elgonemy said. A typical condo-hotel project has "the look and feel of a hotel", including a staffed front desk offering rental services, a concierge, daily housekeeping, and often room service.

The main difference from a typical hotel, he added, is that rather than a single hotelier owning the entire complex, individual rooms are offered for sale to people who can rent their units as part of the hotel, in return for a portion of rental revenue.

Depending on the specifics of rental programme, the owner can use the condo all year round and is free to sell it. Condo-hotels are distinct from time-shares, where a buyer purchases use of the unit for a specific period.

For many buyers, the key attraction of a condo-hotel unit is that they can earn income by placing their unit in a rental pool. "From an owners point of view, it gives a buyer a tremendous advantage of having ownership of real estate with all the amenities that everyone wants and the ability to use it and resell it in the future and during that time have the opportunity to get something in return through the rental programme," said Felix Madera, a vice-president at Sonesta International Hotels, which operates two condo-hotels in Miami.

Investors can expect about a 5 per cent cash-on-cash return on the purchase price of the unit plus any appreciation on the real estate, said one developer.

While condo-hotel units are often seen as investments, many developers say that, unless owners plan to use the units, there are better ways of investing money.

"My advice is not to look at it as a pure investment vehicle," said Ricardo Dunin, president of Flagler Holding Group, a real estate developer whose projects include The Mutiny and Sonesta Hotel & Suites Coconut Grove. "If you don't plan to use it, it probably is not the best investment for you."

Condo-hotels are subject to the vagaries of the hotel industry and, to a lesser extent, the residential market. Some analysts say hotels in many markets across the US have touched the bottom of the cycle and are poised for a recovery. That could be good news for owners of condo-hotel units.

"Condo-hotels are more subject to the hotel market than the residential market," said Brian Collins, a partner at Millennium Partners, a privately held real estate development company whose Four Seasons Hotel and Tower, a condo-hotel in Miami, opens in October. "Virtually everyone buying a condo-hotel [unit] is giving it to the operator for inclusion in the rental programme. So as hotel business ramps up, by definition, the condo-hotel units will achieve a better return than in a down market."

Mr Dunin agreed: "If you believe the hotel market has bottomed and is going to go up, it is probably going to be an exceptional time [for condo-hotels]."

While Mr Greene, who also runs www.condohotelcenter.com, a website aimed at buyers, warns prospective buyers against purchasing a condo-hotel unit solely as an investment, he says those looking for a return on their capital, should stick with franchises such as the Four Seasons, Ritz-Carlton, Fontainebleau Hilton or Trump International.

Mr Elgonemy from Jones Lang LaSalle Hotels noted that by capitalising on a hotel's national affiliation, reservation system, brand recognition and management expertise, unit owners are likely "to receive a higher level of rental income through a rental pool agreement with a recognised professional operator, despite having to share a portion of their unit's revenues.”