The is part two of a seven-part series on value-add investing based on the strategic plan of A&R Development. The last installment discussed the benefits of investing in emerging markets. While the opportunities are real and offer a lot of growth, there is something that was left out. In some emerging markets there is also a low barrier to entry. Yes, a city may be experiencing rapid growth, but it could also have a large inventory of available land.

In the world of value-add hotel investments, the presence of high barriers to entry can be a game-changer. These barriers create a scarcity that investors find appealing, providing a range of advantages that contribute to long-term success. This installment of the series delves into why high barriers to entry are highly desirable when acquiring a value-add hotel:

•  Limited Competition: When the number of potential competitors is low, acquiring a value-add hotel becomes less of a race against other investors. This reduced competition allows buyers to negotiate more favorable terms and pricing, ultimately securing a stronger position in the market.
• Asset Protection: High barriers to entry serve as a protective shield for acquired hotels. If it’s difficult for new hotels to enter the market, existing hotels face fewer immediate threats from newcomers. This stability helps safeguard the value of the property, creating a sense of security for investors.
• Potential for Higher Returns: The core objective of acquiring a value-add hotel is to implement improvements and operational changes that will enhance its value. When high barriers to entry restrict the supply of similar assets, investors can capitalize on the opportunity to generate higher returns on their investments through successful upgrades and renovations.
• Unique Selling Proposition: Hotels with high barriers to entry often possess unique features, prime locations, or well-established brand recognition that is difficult for newcomers to replicate. This inherent distinctiveness provides a competitive advantage, enabling the hotel to stand out from rivals, attract guests, and potentially command higher rates.

The driver behind the importance of a high barrier to entry is simple supply and demand. A hotel is only valuable if people are renting rooms. In a city with only a few hotels and available real estate to build new competitors, then the barrier to entry is high. In this hypothetical city, a developer would have to tear down existing structures to create a competitor, which the higher replacement cost alone could kill the hotel’s chances at becoming profitable. When looking for a value-add investment low barrier-to-entry markets should be avoided at all costs by considering the area’s barrier to entry.

After A&R creates a strategy to prevent market saturation, they are then prepared to discuss the power of hotel branding and how A&R can strategically change branding to increase value in the next part of this series.