Tide beginning to turn on UK hotel investment
Despite a drop in transaction volumes UK hotel investment still offers opportunities as private investors deploy capital.
3 minutes to read
There has been a lull in UK hotel investment activity in 2023 with year-to-date transaction volumes for the hotel market totalling £1.3 billion, compared to the previous year’s figures of £2.8 billion. Despite this, the tide is beginning to turn.
Active capital is currently being deployed from specific pockets of investors, namely experienced hotel owners, high-net-worth-individuals (HNWI), family offices and the re-emergence of private equity.
Buyer requirements
Market conditions have made potential buyers more discerning in their asset selection and heightened their intent to make an attractive offer for the right asset. Buyers want to know they are dealing with committed sellers, and setting realistic pricing that is sensitive to trading performance and the value-add potential is fundamental to the successful conclusion of a sale.
Demand from buyers for hotels which are well-located, and which are well established in their local markets, is set to rise further as the deal flow and the hotel transaction market strengthens.
Investment to date in 2023 into the London hotel market totalled approximately £700 million, down by 50% versus the same period in 2022, but where hotels have transacted, pricing has remained resilient, with the average price per room averaging approximately £350,000 per key.
Private enquiries on the rise
Throughout 2023, we have seen an uptick in the number of enquiries made by HNWIs, family offices, and overseas corporate clients. Not dependent on the sourcing of debt financing, their motivation to purchase is often specific and personal. Whilst some are new entrants, others seek to enhance their collection of UK owned hotel assets which align with their vision and long-term strategy for investment.
We are also now seeing green shoots coming from private equity firms, but those which already have a holding in the market. Targeting specific assets, with significant repositioning potential, this reaffirms the confidence that these investors have, to grow and enhance their existing portfolios, as well as in the future growth prospects of the sector.
An illustration of this trend includes recent acquisitions from The Heartwood Collection, with investment secured by Alchemy Partners for the rollout of pubs with rooms, and Bourne Leisure, which is owned by Blackstone, seeking to grow its collection of Warner Leisure Hotels.
Fundamentals of the UK hotel sector remain strong including a strong operational and trading performance. Coupled with borrowing costs potentially reaching their peak in the current two-year upward trajectory, the reticence in the market is expected to ease. Transactional activity remains patchy, but there are increasing signs of positivity, as deals move forward, and both enquiries and activity begin to pick up.
Retirement sales and end of investor relationships, increasing funder-led pressures, more limited refinancing options and fund maturity are all reasons for assets coming to the market, although some owners are holding firm, choosing to sell only once upon their pricing aspirations have been reached.
EPC upgrade opportunities
An additional opportunity that is emerging is around the repurposing of under-invested, low EPC-grade office buildings that no longer meet requirements of occupiers and investors, into a hotel-led site. This trend is capturing the attention of the opportunistic, well-capitalised and savvy investors such as Whitbread which recently acquired the freehold of New London House, a major office building in the City of London for £56 million.
Recent Knight Frank research reveals some 50% of London offices are EPC-D rated or below, and whilst constraints will not allow certain buildings to be remodelled, there will be plenty of prime sites that lend themselves towards delivery of best-in-class, sustainable, high-quality hotel schemes.
We expect that investor confidence and sentiment in the UK hotel market will be further strengthened by a period of economic stability, with core inflation now trending downwards and the current pause in interest rate rises. With continued strong trading performance anticipated, we look forward to seeing what 2024 has in store for this ever-evolving sector.
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