1 Hotel cover.indd - Nicola Cottam

REITs: An Overview
by Peter Hackleton, senior manager in the Tourism, Hospitality and Leisure team at Deloitte
Is it better to separate the business of running the hotels from owning the bricks and mortar, or to keep them
together under one enterprise? This is a question that has occupied the hotel industry for decades and with the
introduction of Real Estate Investment Trusts in the UK, the question has become a hot topic once more.
Those in favour of a division have pointed out that real estate investments tie up capital and that the stock market
tends to value management companies higher than those involved in real estate. Many believe the property
ownership element of an integrated hospitality company can drag down an organisation’s overall value. They cite
several clear benefits for breaking away.
Breaking away allows hotel operators to improve the return on their assets by partnering with property investors,
who bring in asset management expertise and capital. They can also secure long-term management or franchise
tenure over their portfolio and improve their debt rating. Critically, they can stay focused on the hotel brand.
The underlying rationale that the sum of the parts is greater than the whole was illustrated perfectly by Marriott
Corporation when it decided to divide up its hotel business in 1992. The split created two separate entities – Host
Marriott, which is today the world’s largest hotel Real Estate Investment Trust (REIT), and Marriott International,
which now mainly manages and franchises hotels on behalf of owners such as Host Marriott.
The split enabled each team to focus on its core skills. However, while the corporate finance aspects of this initiative
were enticing, few operators initially decided to follow suit. Operators were concerned about the tax implications
of selling relatively low property prices, and the relinquishing of control of their property portfolios.
However, over the past decade there has been a change of opinion. Now, no operator can ignore the opportunity
to free up capital to fund further expansion.
Today, there are several good reasons why hotel properties are now more widely regarded as an asset class. In
particular, the growth of REITs worldwide – which are willing to pay generously for hotel property and looking
for a hotel operator to do business with – is significant.
Tracking the changes
Key Issues: Real Estate Investment Trusts: An Overview
REITs can be traced right back to the 1880s in the US, but they didn’t become popular until the 1960 real estate
investment trust tax provision gave them advantageous tax status. Through these trusts, investors could avoid
double taxation, as they were not taxed at the corporate level if income was distributed to beneficiaries. This has
continued to be the main pull ever since.
March 2007 Hotel Report Guide to UK Hotels l © William Reed Publishing 32