UK hotel investment defies expectations, recording £6.0 billion of investment in 2019
There remains a sizeable weight of capital continuing to target the UK, with hotel real estate a prime investment target.
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Despite activity dampened by Brexit related uncertainty, the impressive £6.0 billion of hotel investment in 2019 was achieved as a result of continued strong demand from investors seeking long term, secure income streams; record levels of institutional investment; and alternative property types favoured ahead of other mainstream property. Investor awareness of the growing demand for experiential travel and location based experiences are further driving investment in the sector.
"The average transaction price per room throughout the UK remained on par with 2018 prices at £168,000 per room.”
(excludes the Grange portfolio, developments and ground lease transactions)"
Following an exceptional level of portfolio activity in 2018, year-on-year hotel transaction volume slowed by £1.2 billion for the full year 2019, equivalent of a 17% decline, but witnessed a decline of only 3% compared to the 5-year mean average of £6.2 billion and exceeded the 2017 total investment volume by 5%. Confidence in the hotel sector remains strong, driven by a resilient trading performance and greater understanding of the fundamentals of the UK hotel sector.
During 2019, holding the asset for longer has been the route of choice, with exit strategies reviewed and hold periods extended due to the challenges of redeploying capital once a property has been sold. With strong and growing demand for investing in specialist property, retaining the allocation in hotel real estate can be difficult due to the strong competition from a widening pool of buyers.
Hotel investment topped and tailed the year. The first quarter of 2019 saw the greatest share of deal volume, with £2.6 billion of deals completing during the first three months, driven by a significant volume of portfolio activity. A lack of clarity over the UK’s position outside of the EU, combined with a turbulent political climate, led to minimal investment during Q2 and Q3, as investors deferred their investment decisions. During the final quarter of 2019, hotel investment once again turned up a gear, with some with £1.5 billion of deals completing, equivalent of 25% of the total transaction volume.
London
London recorded a subdued level of investment in 2019, with investment of £2.7 billion, representing a decline of 11% year-on-year. This is due to the quality and number of assets coming on the market, with smaller and lower value hotels transacting. Nevertheless, the level of investment in 2019 is equal to London’s 5-year average investment volume and is 10% higher when compared to 2017 volumes.
London’s share of total UK hotel investment volume increased to 43%, boosted by the £1 billion sale of the four Grange hotels. London’s transaction price per room increased by 41% to approximately £457,000 per room, boosted by 74% of London’s transaction volume involving a five-star asset. However, stripping out the sale of the Grange portfolio and the ground lease deals which completed simultaneously, revealed that London’s average transaction price per room actually declined by 5% compared to 2018, to an average of £303,000 per room.
Whilst scarcity of existing hotels coming to the market has almost certainly steered some investors towards investing in hotel development, the underlying growth in hotel development has stemmed from the prolific sources of capital now available. In 2019, Development transactions in the UK totalled over £1 billion of investment, with 57% of the transaction volume targeting London sites and total development volume in London’s rising by 19% compared to the previous year.
Regional UK
The total volume of hotel transactions in regional UK equated to £3.2 billion, a decline of some 20% compared to 2018, but equalling the level of investment recorded in 2017. A sharp decline in portfolio transactions was the underlying catalyst for the significant fall in regional UK investment in 2019. Portfolio transactions represented 35% of total regional investment, (compared to 53% in 2018), with the transaction volume declining by 47% to £1.1 billion.
However, in regional UK the average transaction price per room in 2019 increased by 20% year-on-year, to £146,000 per room. With growing demand for long-term, secure income streams, the average transaction price for a fixed lease asset increased on average by 35% year-on-year, to £123,000 per room. Assets selling with vacant possession, witnessed growth of 7%, to an average of £147,000 per room.
Hotel Investment Outlook 2020
In 2020, we can expect investors to become more confident following the Conservative party’s recent victory, albeit caution is likely to grow if no extension to the end date of the transition period on 31 December 2020 is sought. We anticipate that 2020 will see an increase in stock becoming available, with hotel investment volumes having the potential to extend beyond the 3-year average of £6.3 billion. Key to achieving this goal is the UK remaining attractive to overseas investors, with increased investment likely from Thailand, Japan and the Middle East. However, we remain alert to the continuing risks of the Corona Virus and its potential to cause a global slowdown in travel.
"London’s position as one of the world’s most liquid and transparent real estate markets is expected to drive continued new pools of opportunistic investors to the UK, with hotel real estate a prime investment target.’
Henry Jackson, Head of Hotel Agency, Knight Frank"
Investors will increasingly look to invest in markets with strong demand generators, and seek out well located assets benefiting from strong covenants and experienced management teams. There remains a sizeable weight of capital continuing to target the UK, with compelling factors such as transparency, liquidity, language, corporate governance and currency plays enticing investors. Margin pressures will certainly put pressures on operators to improve efficiencies and this in turn is expected to churn investment opportunities.
For more information or to see how Knight Frank can assist contact:
https://www.knightfrank.co.uk/commercial/sectors/hotels