Positive outlook for UK Hotel Investment as portfolio transactions drive activity
4 minutes to read
The return of portfolio transactions has bolstered UK hotel investment during the first six months of 2024 with investment totalling £3 billion, compared to just £990 million over the same period in 2023 and far beyond last year’s total transaction volume of £2 billion.
The recent £850 million acquisition by Blackstone of the 33-strong regional Village Leisure portfolio, Starwood Capital Group’s £800 million purchase of 10 Radisson Edwardian Hotels in London and Landsec’s £400 million disposal of its hotel portfolio to Ares Management, where Knight Frank advised the vendor, are all examples of the quality of portfolio deals completing so far in 2024.
Whilst these results are hugely encouraging, with H1 investment just 10% lower than the volume of transactions taking place in H1-2019, activity has been dominated by the completion of a few sizeable, but somewhat protracted portfolios transactions. As such, H1-2024 investment volumes need to be considered in the context of the timeframes these transactions have taken to crystallise.
Historically, robust levels of hotel investment have taken place through a mix of sizeable portfolio and single asset deals transacting. Yet, in H1-2024 there was a notable lack of quality, single asset hotels available for sale, which was representative of the current market conditions at play. Consequently, a 19% decline in the number of single asset hotel deals transacting was recorded, whilst deal volumes for single assets were down by 34%, compared to H1-2023.
The challenging investment market has also impacted on the volume of developments and individual fixed income deals which have transacted. As such, portfolio transactions accounted for some 76% of the total H1 transaction volume, which compares to just 53% in H1-2019, when a similar level of portfolio transactions took place.
Some sellers’ expectations have now started to edge closer to buyers’ pricing levels, but transaction timelines continue to impact the market and the ability to conclude a successful sales process. Vendors are having to remain patient and bide their time to achieve their investment goals. The ongoing high cost of debt, a buyer’s unwillingness to price in future growth prospects or commit to expensive unforeseen capital investment, are all factors that have both slowed or stalled the pace of transactions.
London has been the epicentre of activity during the first six months of the year, with some 50% of investment focused on the capital, driven by overseas investors who channelled some £1.3 billion into the city. Whilst much of the activity stemmed from portfolio transactions, the active capital came from a combination of private equity and institutional buyers. US investors have dominated the landscape, accounting for some 77% of the total UK investment activity.
The second half of 2024 is expected to yield further robust activity, with various other hotel portfolios seeking to change hands. Transactions involving single asset hotels will continue to remain more challenged if stock remains in short supply, but as Q2-2024 has progressed, the number of opportunities coming to the market has increased, albeit of mixed quality.
Whilst levels of distressed sales are expected to remain substantially lower than compared to other cycles, there is evidence to suggest that stakeholders are not only increasing the pressure on owners to bring assets to the market, but at deliverable levels that will conclude in a successful and more timely sale.
With interest rates expected to reduce from the autumn and once the General Election has passed, greater levels of investment activity are expected, from both domestic and overseas investors. Having remained at a relatively low level during the first six months of the year, investment volumes from the Middle and Far East are likely to switch up a gear, with the potential for improving political and economic transparency and reduced currency volatility. Meanwhile, European family offices have been active in the sector, and this is expected to continue, remaining attracted to those hotel markets where performance has been resilient and with moderate levels of new supply.
Off the back of a strong start to the year, the outlook for H2-2024 is encouraging, with momentum for investment in the UK Hotel sector continuing to build and benefitting from a diverse pool of well capitalised investors.
Henry Jackson, Partner and Head of Hotel Agency at Knight Frank:
“The direction of travel for the sector is positive and the volume of portfolio transactions is evidence that the sector remains attractive. An increase in the quality and the number of hotels seeking to transact is expected, as hotel owners who have extended their investment cycles now seek to realise their exit strategies. Where a particular asset meets all the investment criteria, we have seen certain buyers willing to pay full prices for these assets. With a strong pipeline of hotels currently in legals, the Knight Frank Hotels teams expects this momentum to continue, and an interest rate cut will serve to further enhance the current optimism for investment in the UK hotel market.”