Summer is only a few months away and everyone is making plans for their annual trip abroad. Most of us spend time selecting the perfect hotel or apartment and pay for the amount of time we use it each season. But what if you could:
- get a cheaper rate for accommodation each year, even during peak seasons; and/or
- make money from the accommodation whilst you’re not using it…
I suppose you might think I’m referring to investing in an overseas property. Well, not quite. This article is all about timeshares and buying hotel rooms as an investment.
Both these investment examples are huge in the USA. With the UK Government scrapping the applicable tax relief in 2015, domestic by-to-lets have now become less attractive. Instead, you may find that investing in the recently regulated timeshare market or buying a room in a hotel to rent out is an attractive, long term addition to your portfolio.
Timeshares – Time for a new look?
Investing in timeshares involves buying the right to spend a specified period of time in a holiday property each year. It is important to note that you are not buying a share in the freehold of the property, only the right to use it.
The major advantage of purchasing a timeshare is that the accommodation is held on trust (or registered on a public register) for the duration of your right to use it. So, you and your family will have the security of knowing that every year you can holiday in your favourite destination, in quality accommodation, below market rates. If and when you become tired of holidaying in the same destination, you can sell your timeshare on to someone else and even move on to a different timeshare.
An unfair reputation
Due to the lack of regulation in the past, timeshares have developed an unsavoury reputation for ripping off holiday-makers, or tying them into situations where they are forced to pay annual maintenance fees on a property they cannot use or sell.
However, the industry is now regulated by the European Union Directive on Timeshare, Holiday Products, Resale and Exchange of Contracts – EU Directive 2008/122/EC. This directive was imported into UK Law through the Timeshare, Holiday Products, Resale and Exchange of Contracts Regulations 2010.
The regulations apply to the following types of contract:
- timeshare contracts: contracts for a duration of more than one year;
- long term holiday product contracts: also contracts for a duration of more than one year;
- resale contracts: contract where a seller assists the buyer to sell or buy a timeshare or a long term holiday product in exchange for consideration (payment);
- exchange contracts: contracts where the buyer joins an exchange system that allows her access to overnight accommodation and services in exchange for granting other individuals temporary access to the benefits of the rights deriving from the buyer’s timeshare contract in exchange for consideration.
Now, if you were to buy a timeshare today, the seller is obliged to comply with the following:
- Make you aware of key information about the timeshare– that information must be in writing, it must be clear and it has to be given to you without charge;
- Provide any information given to you in your own language;
- If the contract is in another language of the EEA, then the seller has to give you a certified copy of the translation;
- The contract must be in a standardised form;
- You have the right to withdraw without providing a reason;
- If you withdraw from a contract, the date you sent it on is the date that your cancellation is deemed to have been given (make sure you send your cancellation notice by recorded delivery!);
- The withdrawal period is generally 14 days from the start date of the contract, after which time you cannot rely on this withdrawal period;
- If you withdraw within the time period for a contract, you will not be liable for any charges or costs for that contract or any connected or ancillary contract;
- If you withdraw within the time period, any credit agreement also expires without further cost to you;
- No payment should be given until the end of the withdrawal period.
The EU Directive has been adopted by all members of the EU and has equal applicability and enforcement.
These regulations now offer strong protection to potential purchasers of timeshares, and along with professional legal advice, should prevent the development of a horror story and instead offer individuals the opportunity to purchase their own little slice of paradise.
Investing in a hotel room
The idea of investing in a hotel room is simple; you buy a hotel room on a 999 year lease. The hotel management company will then rent it out to paying guests.
Although it may seem a strange form of property investment, consider this: investment in European hotels in 2015 topped €16billion – more than three times the total in 2007. Hotel investment is a growing industry and can offer returns of 6-15 percent per annum.
Another advantage of investing in a hotel room is that you can remain completely hands-off. The hotel management company usually takes care of all the details such as ensuring the room is maintained and occupied, etc.
Are there risks? Of course. Cross-jurisdictional contracts can be lengthy and complex. If a natural disaster or terrorist attack occurs in the area where your hotel room is located, causing custom to drop, it may prove very difficult to sell the asset and recoup your money. However, with good legal advice, a properly negotiated contract in place and by selecting your hotel location wisely, you can minimise the likelihood / impact of these factors affecting your ability to make a return.
A Growing Trend
Investing in hotels and timeshares is still in its infancy in the UK. However, as mentioned above, the concept has been around in America for decades. Although, due to historical scams, interest in timeshares waned for some time and has recently experienced a renaissance. In part, this is due to well-established companies such as Marriott, Disney, Hilton, Hyatt, and Wyndham informing the public about the benefits of timeshares seeking to counteract the shady reputation that developed in the early stages of the timeshare industry.
With the protection of the European Union Directive on Timeshare, Holiday Products, Resale and Exchange of Contracts and increasing unattractiveness of the UK residential buy-to-let market, it is likely that interest in hotel rooms and timeshares will increase in the UK over the next few years.
The Legal Issues
Whether you decide to invest in a hotel room or timeshare, I cannot emphasise the importance of performing thorough due diligence enough. On top of the usual checks on the property and the investment returns, amongst other things, ensuring the hotel or seller is solvent and that you have the right to resell the property could save you an enormous amount of grief later down the line.
You will also need to clarify whether any percentage returns / rental income received is in respect of the ‘gross’ return or ‘net’ return. Net return will be less as it will account for expenses paid before it is paid to you. Gross return will be the rental income before expenses have been accounted for. Don’t get caught out calculating your expected return using the wrong figure.
It is also imperative to negotiate which periods you will be able to use the property / hotel room for personal use. There is usually a restriction during peak seasons so these periods should be made clear from the outset. The last thing you want to find out is that you cannot use your timeshare in Spain in August.
Investing in a timeshare and/or hotel rooms can provide solid returns in addition to having a secure place to enjoy your annual trip abroad. The caveat to this is you need to seek professional advice and ensure you, your solicitor and financial advisor make the proper due diligence checks to ensure you end up with an excellent deal and not a permanent holiday mistake from hell.
Saracens Solicitors has years of experience advising investors on purchasing timeshares and hotel rooms, both in the UK and abroad. To find out more about our services, please phone our office on 020 3588 3500 to make an appointment with one of our solicitors.
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