Are castles good investment?

Dev Anand, the Managing Partner of The Hotel Property Team (THPT) shares his opinion on whether castles are good investment and on when we should expect the recovery in the hotel and travel industries which were hit hard by the 2020 COVID pandemic.

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Dev Anand, Managing Partner, The Hotel Property Team
@Castles_and_Palaces's Artiom Ganin sat down with Dev Anand of the London-based The Hotel Property Team. Dev has worked in the hotel industry for the last 40 years and possesses vast knowledge of the market which suffered a blow in 2020 due to the world-wide COVID pandemic. We've talked about whether it is wise to invest in castles as hotels, what you have to bear in mind if you wish to do so and generally discussed the market outlook for the next several years. One thing is absolutely clear now - the pandemic has offered new opportunities. Those owning castle hotels can make use of the lockdown to focus on much-needed refurbishment and repairs while those seeking to acquire a castle or a hotel can easily ask for a substantial discount. The market is likely to recover in several years and it is time to act now if you want to be successful.

KEY RULES TO MAKE YOUR CASTLE A SUCCESSFUL INVESTMENT

Castles_and_Palaces (CnP): Dev, thank you very much for this opportunity. You've been in the hotel business for decades. Are castles popular as hotel investments?

Dev Anand (DA): Hello! Forty plus years I've been in the hotel business. For many of those years I was a hotel booking agent. I used to send business to hotels - both accommodation and meeting and conference. So, I could probably answer that question from both sides. It is the popularity of castles and stately homes from a booking point of view. I act as a hotel broker so I buy and sell hotels and therefore today I could tell you more about the investment value. What can you buy it for and what can you sell it for.
DA: Whether it's a castle or a new-built Hilton there are certain rules, if you like, to the game about what makes a hotel work. So as a castle and a beautiful building, you still probably need to understand those rules.

The hotel business has transformed hugely from the days of 30 years ago, when Americans wouldn't stay in a hotel that wasn't called a Hilton or a Holiday Inn because they liked the comfort of what they had at home. Particularly in Europe, particularly in France the plumbing wasn't great. So, you know they wanted their power shower.
Whether it's a castle or a new-built Hilton there are certain rules to the game about what makes a hotel work.
DA: That has so dramatically changed particularly for the well-seasoned traveler and the Americans are probably running ahead of everyone else. People want something whether it's an experience or authenticity or the accommodation they are staying in. They want to live like a Londoner when they're in London or live like a Roman emperor when they are in Italy.

I think today is a fantastic time. This time is fantastic for castles and stately homes to be able to offer something, which clearly a modern everyday purpose-built last year hotel can't.

HOW LONG DOES IT TAKE TO MAKE A DEAL?

CnP: That's really interesting - in the last several years it all changed. Let's talk about what you do - you help investors buy hotels and you help owners sell them when they wish. What should I do if I want to sell or buy? Should I just get in touch with you and explain to you what I'm aiming for? How do we proceed from that?

DA: Yes, absolutely. I have a weekly mailing list of about 1,600 people: they are hoteliers, many of whom are hotel development directors who are looking to expand. Others are the money - the money people - they are sovereign officers, family officers, equity partners, capital partners and so on. They are large and small from the very top, the black swans of this world - if they could buy the Vatican they would tomorrow - through to more humble private owner.
DA: Setting the deal out would be very easy. We will take the details of what it is, we immediately respond in saying look I think we've got something really special here or forget it pal, it is not going to work. We agree some basics of a success fee. There aren't a lot of fees but if we are successful in selling the hotel there's a small fee to be agreed.

Just going back to the rules though – the key I think is size, shape and viability. Anything smaller than about 40 or 50 rooms really needs to be an owner or an operator hotel business. Because you can't afford to have a whole array of staff, general managers and other managers involved. A lot of castles obviously might have some 20-30 rooms, that's probably borderline – if it is very special we can make it work. But the more we are nearing the 50 rooms, the more viable it is for an investment owner rather than an owner that wants to operate.
CnP: That's what I wanted to ask you right now. Castles are very unusual buildings and some of them are in a really bad shape. They are big, they're old and they're not that practical buildings to live in. What are the key ingredients to make a successful deal if you want to invest and restore an old castle into a lavish hotel? What are the key factors?

DA: Of course, each one's going to be individual but in general you are very right. The older the building the more likely that the plumbing, the general maintenance and air conditioning is going to be critical as to whether it has a normal operating cost or whether it'll cost a fortune because the lounge is not normally a lounge. It's the size of most people's houses and you have to think about the cost of heating that room.
Сastles and stately homes can offer what a modern everyday purpose-built last year hotel cannot.
DA: The other critical cost of running a hotel really comes down to staff - the labor cost. And labor cost traditionally in most hotels' financial models is around about 30%. It could be lower, it could be slightly higher. The more luxurious it is the more acceptable it is for being higher.
DA: As for a castle, there's no point in doing it as a 2-star or 3-star property. If you are going to do it - aim for 5 stars because it's all about luxury. Your guests want the authenticity, but they still want a decent shower. So, you are going to have to cater for both. But people will spend average room rates these days - a few examples I may think of – you're round about 200-300 euros, pounds, dollars, whatever per room per night.

The most famous, the most relevant marketing organization is Relais and Chateau, which was started in France. It now has about 500 hotels in membership, maybe even 600 as well as restaurants. A lot of them are in France but now quite a few are in most European countries and even in the US. They are all privately owned so Relais simply acts as a marketing organization. Properties with rates which are less then 300 pounds or euros a night are not probably its members but there'll be many members who offer rooms at 600, 700 or 800 pounds or euros.
DA: So, you need a good financial climate, you need the ability to travel which is the key component that is not there now. But as we come of COVID the biggest market to return is what they call the staycation market. This is the opportunity for the residents of a given country to use that establishment for their holiday in the short breaks rather than having to get on a plane. Plane travel will resume in due course. But if everyone in the world gets vaccinated tomorrow – it is still a fair way to go – it will still take 6-9 months for business to return. And that first level of business is going to be staycation and it will be a year, 2 years, 3 years even 4 for the rest of the world to get back to how it was. The last 10+ years in hotels – even in 2008 when we had a financial crisis that affected the world - the hotel industry was magical because it was very resilient, hotels remained strong.

In this post-COVID transition that we are looking forward to - if you take Scotland which probably have more castles than most of England – the Gleneagles type of hotels, a beautiful looking building that looks like it should be a castle but it isn't – are going to start returning to good opportunities and good room rates before the Hilton or the Hilton Park Lane or the Dorchester.

COVID PANDEMIC - TIME OF OPPORTUNITIES

CnP: Based on your experience, which European castles sell better now and why? You mentioned the UK, Scotland, but if we speak about France, Italy and Germany, what would you say?

DA: French chateaus, beautifully looking buildings with history where George V had lunch, Italian palazzos like ones in the Tuscany region or in Venice, German schlosses you know - most of them are privately owned .They are probably members of the marketing consortiums like Relais and Chateau, Leading Hotels of the World etc., those small luxury hotels have different marketing opportunities. They are extremely good, they are getting good press coverage, getting into the travel agents that specialize in the top-end market, business and so on. I'd say if there's a castle and you can operate it as a hotel, you can do well. There's no reason not to.
CnP: In the current context when the pandemic dealt a blow to the industry last year, do people buy more or do they sell more including castles now?

DA: Every call that I've taken in the last 6 months starts with the line saying do you have a property that I can acquire with a "COVID discount". The COVID discount is now defined as a price that is somewhere between 30-40 percent less than it might have been in 2019. And the answer is – on some markets YES, on some markets NO. On the weaker markets – weaker for different reasons – let's say in Spain, Italy, Eastern Europe Greece, around the Mediterranean, there are now some interesting bargains available. Hotels that were on the market at 80mn euros are now down to 50mn.
DA: Other markets interestingly enough particularly in cities – Paris, London, Edinburgh, Amsterdam, Berlin - are actually quite strong. So, what's tending to happen is that major banks if they have already lent you money in previous years and let's say you are indebted to the tune of 40-50 percent of the value of the building are kind of hanging in there supporting you. If you can't afford the repayment what's the point in closing you? What are they going to do anyway?

The difficulty now is raising the finance on a new project – and for that you've probably need to have some very special reason and argument. I've seen ten funds of about 500mn euros each being put together in the last few months that are specifically cash in the bank waiting there for bargain opportunities to be executed over the next 3-6 months. There's a lot of money out there, it needs to be lent because otherwise they don't make any income. If there's a sound business proposition there's no reason why they won't lend the money.
CnP: It looks like these are the opportunities which the crisis offered to everybody, doesn't it?

DA: Sure! I wouldn't be a seller just for the sake of it today. The most expensive deal ever gone through the history of hotels happened in March of last year, just as we closed down. And it was the Ritz in London which was sold for 750mn pounds - for a hotel that did not even make a profit. It's a beautiful building, it's not a castle, but it's a stately looking building. It was bought for 75mn pounds 10 years earlier. The appreciation in capital was huge at this price. It was simply a Qatari woman – the wife of a Qatari fellow – who used to go and have a cup of tea there and she said I love this hotel Ritz, it's a fantastic hotel, so I will sign a check tomorrow to buy it. And they bought it in the middle of the lockdown.
CnP: I have a question about the buyers – you mentioned a Qatari woman, and we know that the Chinese have recently been very active on the market especially in France where they started to buy up French chateaux both winemaking and other. What about the profile of a buyer: where does they come from: Asia, North America, Europe or maybe Russia?

DA: Pretty much all over. Buying in the UK right now for example is not that clever because of the sterling to dollar to Singapore dollar ratio – that's why the markets of Portugal, Greece and Spain are doing better. I think individual buyers come from the same countries – Middle East, China, Singapore, bits of Europe where you don't even know where they come because they are very private people. But then it comes down to the funds. We have the 500-million-dollar fund just sitting there. Anyone selling today wants to know two things – whether we've got the money and can we make it a quick deal because we don't have time to muck around and lawyers can't even meet the people these days. All of this needs to be done on Zoom and kept simple.
CnP: How much time does it normally take to finalize a deal?

DA: The long bit is making a decision whether you want to buy it. So, the process really is somebody phones me tomorrow and says – I've got this fantastic looking property and I want to put it on the market. So, the first bit is how much information do you have on the property, do you have proper floor plans, not just on the back of a cigarette package, like proper things on a PC. As a potential buyer I can say – all right, I want a SPA, where can I put it? The 2019 financial accounts are critical. Nobody is interested in 2020 because there was no business, so maybe 2018 and 2019. You have to get them prepared before you even go to the market.
DA: Stage 1 – what information you have, Stage 2 – we show it to a few people and somebody puts their hand on and says I like the look of that. It is then the internal decision making from the buyer side, sometimes they have monthly board meetings and they have to take it to the board for approval, and it is all about the viability, it is about how they trade if they had it and what if they put this brand to it and what could they make on that over a 5-year period. I think most people in their evaluation say we've got COVID but that doesn't matter if we have the ability to see through COVID. COVID is a great time to do your refurbishment because there are no customers anyway so you can buy things, shut the building down, spend two years doing it up. As long as you are ready to be open by 2023-2024 this would work. And once they have agreed the price and shaken hands on it, it's a 60-day due diligence. And again, the more information the seller has the better.
There's no point in doing your castle a 2-star or 3-star property. Aim for 5 stars because it's all about luxury!
DA: The buyer just wants to know that there's no pending law case coming through, or any indebtedness we don't know and so on. Remember when you sell a hotel you can either sell the asset or the whole business. Let's say you own a business that owns a castle, you can decide to either sell it – like I want to keep the business, I just want to sell the hotel. And that's just a pretty clean and quick bit. If you sell the company more due diligence has to take place. I must make sure there's no liability to that company because as the new owner of the company I'll be responsible for that. If I buy the building I just need to make sure the building is not going to fall down tomorrow. Sometimes hotels are held in what's called SPVs or Special Purpose Vehicles. Some see it as a tax dodge, others as a sufficient way of doing things. That has its own merits and benefits.
DA: Every country has its own laws and duties when you buy a building. In some countries like Switzerland if you are not a resident of the country you have some procedures to go through. Then a 15 to 30 days of exclusivity period follows when we just get our finance in place. That might be a refundable or non-refundable deposit just to show your interest, the buyer then takes the property off the market and then you have 60 days to finalize everything. There's no reason why you can't do things reasonably quickly and in fact with Zoom people are doing the viewing by a video link.
CnP: But you can miss something if you do it by Zoom. Still people resort to this opportunity, don't they?
DA: When you buy a house for yourself one of the things you do - you hire a surveyor who goes and checks every room and every wall and this and that. I asked a hotelier one day: so, you've got a 200-room hotel what do you do? Do you get a surveyor to check every bedroom? He said no, I kick the walls, if the building has been there for 50 years or for a hundred years I need to make sure it is not going to fall down. This is the only think I need to know.

CnP: So, it looks like several months at least for the deal to be finalized.
DA: 2 to 3 months, can be longer.
CnP: Speaking about COVID – I talked to a castle hotel owner in Tuscany about how they fared through 2020. He told me this thing: you know our castle is exclusive, we have like 5 or 10 rooms for our guests to stay and we have 20 people at a time, this is our maximum. And if we think about it in the context of the newly introduced methods to curb the spread of the disease I think it works and it works in the sense that it is not that bad for such small exclusive hotels – they can fare relatively nice. What would you say?
The reality is that general managers of brand chain hotels, castle owners and other hoteliers are all terribly friendly!
DA: Exclusive use is an interesting subject. I think we've probably started it in the UK or Europe where you can either run as a hotel where you've got 10 rooms and 10 individual customers. Or you can run this for exclusive use only - we've got quite a few examples of that in Europe. Somebody says I'm going to hire it and have an absolutely exclusive leave for three days for a wedding or comfort or whatever.
DA: There's a lovely story. There's a place called castle Ashby in Northamptonshire, which is owned by Earl Compton. And it is in exclusive use. So, Tom Cruise when he was married to Nicole Kidman a few years ago had it for their exclusive use. He was in England doing some filming and they just wanted a short break for 4-5 nights. This is a unique building, it has fantastic art, antiques and history. Elizabeth I - not Elizabeth II – slept there, Henry VIII visited it and it is linked with all these people. Tom Cruise and Nicole Kidman had their meal in a different room every day and they slept in a different room every night. And they had a great time!

CnP: I can imagine. This is very nice experience. Looks like you are traveling but at the same time you are confined to one building.
DA: Exactly. Traveling in one building.
CnP: Dev I think we've covered so pretty much everything
DA: Yes! If you've got owners of castles which are contemplating – what we can do is to put them in touch with owners of castles which are now operating as hotels. One thing about the hotel industry is that people are very friendly. You would imagine a guy in Marriott would be a big competitor of Kempinski. Actually, the reality is that general managers of brand chain hotels, castle owners and other hoteliers are all terribly friendly. They all meet on a regular basis because they have the same problems. They even can borrow something from each other. The other thing is that if you are geographically in the area where there's only one hotel you are a little bit out on your own. Whereas if you've got five hotels around you it becomes an area where people tend to come and stay. I can think of a lot of private individuals that own and manage successful castle type hotels and if someone says can I have a phone conversation – I am thinking I am doing this, walk me through the pitfalls and so on - I am sure we can put them in touch.

CnP
: I will bear it in mind and if such a request arrives I will definitely get in touch. Dev, thank you! That was insightful.
DA: It was very good to speak to you. And I wish you and all your friends and member a successful 2021 and even better 2022.
We very much hope that you liked the interview with Dev Anand from The Hotel Property Team!
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