by Diogo Canteras - Founding Partner, HotelInvest

The hospitality sector has unique characteristics that demand strategic financial management, especially regarding capital expenditure, known as CAPEX. Unlike OPEX (Operational Expenditures), which covers day-to-day operational costs such as preventive maintenance and minor repairs, CAPEX is associated with long-term improvements. This type of investment is essential for preserving or enhancing the asset's value throughout its lifecycle.

Although the distinction between CAPEX and OPEX is crucial, it is not always clear in practice. This ambiguity can cause conflicts between owners, asset managers, and hotel operators, particularly when contracts do not precisely specify the responsibility of each party for these expenses. To avoid such issues, it is vital for the parties involved to reach a consensus during the annual budget preparation. This alignment allows for a clear definition of how expenses will be allocated between CAPEX and OPEX, preventing disputes and ensuring that necessary investments are made at the right time.

The Role of Preventive Maintenance Plans

One of the most effective tools for CAPEX management is the Preventive Maintenance Plan (PMP). It enables hotels to anticipate repair and renovation needs, reducing emergency costs and extending asset life. Additionally, a well-structured PMP helps prioritize investments strategically, maximizing the return on invested capital.

Using a PMP also promotes efficiency in resource allocation. By identifying and scheduling necessary investments, hotel management can avoid waste and ensure that improvements are made in a planned and sustainable manner. This is especially important in the hospitality sector, where the quality of facilities directly impacts the guest experience and the competitiveness of the property.

CAPEX Challenges Over a Hotel’s Lifecycle

A hotel's CAPEX needs vary throughout its lifecycle. During the early years of operation, expenses are typically lower, limited to adjustments and minor improvements. However, after about seven years, investments increase significantly as many assets require substantial replacements or renovations to maintain the hotel's market competitiveness.

Hotels located in coastal regions, for example, face additional challenges due to salt corrosion, which accelerates the deterioration of materials and equipment. These peculiarities make proactive planning even more critical to preserving the asset's quality and value.

A study titled “CAPEX 2023 – A Study of Capital Expenditures in the Hotel Industry”, conducted by HAMA and ISHC, provides valuable insights into CAPEX spending patterns in the hospitality industry. According to the findings:

• On average, hotels allocate around 8% of their annual revenue to CAPEX over a ten-year period.

• Approximately 4% of total revenue is directed toward maintenance and repairs (R&M).

• Resorts have the highest proportion of CAPEX, with 10.6% of revenue allocated to improvements.

These figures highlight the importance of long-term financial planning and the strategic allocation of resources. In a highly competitive market, adequate investment in CAPEX is a crucial differentiator for ensuring business sustainability and success.

Reserve Funds: An Essential Practice

A common practice to ensure resource availability for CAPEX is creating a reserve fund. This fund is built from a percentage of the hotel's monthly revenue and serves to cover future expenses related to maintenance, replacements, and renovations. When well-managed, the reserve fund facilitates financial planning and minimizes the impact of unexpected expenses.

Despite its relevance, contributions to the reserve fund are not always sufficient to meet CAPEX needs. The aforementioned study points out that while the ideal would be to allocate 8% of gross revenue to maintenance and renewal, the average collection is usually only 4%. This gap is even more evident in Brazil, where the economic crisis of recent years, exacerbated by the pandemic, has drastically reduced hotels' revenue generation capacity.

Over the past 12 years, many hotels in Brazil have struggled to maintain their reserve funds at adequate levels. As a result, unmet CAPEX needs have accumulated, compromising the quality of facilities and the competitiveness of the national hotel sector. Only recently has the industry begun to recover its revenues, reaching levels close to those of 2012.

The Importance of CAPEX in Hotel Competitiveness

A lack of CAPEX investment can lead a hotel to lose market share to competitors offering more modern and well-maintained facilities. In this context, balancing maintenance and renewal costs with the expected return is a strategic decision that can determine the long-term success or failure of a property.

Investing in hotel revitalization has a direct impact on average daily rates and business profitability. Modernizing environments, renovating facilities, and providing a differentiated guest experience not only justify higher rates but also attract a more demanding and affluent clientele.

A practical example from HotelInvest's Asset Management portfolio illustrates this impact: after a revitalization project, one of the analyzed hotels achieved an average daily rate increase 8 percentage points above the local market. This superior performance also reflected in profitability, proving that well-planned CAPEX investments generate significant returns and enhance the property's revenue potential.

Planning and Collaboration: Keys to Success

Strategic CAPEX management is essential to preserving asset value and ensuring competitiveness in an ever-evolving market. Tools such as the Preventive Maintenance Plan and reserve fund creation are fundamental pillars to achieving these goals. However, the success of these initiatives depends on collaboration among owners, operators, and asset managers.

It is crucial for the parties to work together to develop long-term investment plans that meet the specific needs of each asset. This planning must balance available resources with the expected return, ensuring that investments are made efficiently and at the right time.

Additionally, adopting transparent financial management practices and clearly defining the responsibilities of each party are important steps to avoid conflicts and maximize results. By adopting an integrated and proactive approach, hotel properties can not only preserve their competitiveness but also secure their financial success over time.