Hotel transactional activity in the U.K. in Q1 2023 more than doubled compared to the last quarter, after a muted end to 2022, a recent report has revealed. The deal volume, however, has remained significantly below the five-year quarterly average of £1.2 billion ($1.5 billion), a recent Knight Frank report has said.
The completed deals were almost exclusively single-asset transactions, with less portfolio activity but a 50:50 split between regional U.K. and London completed sales.
Corporate investors in the U.K. were most active in terms of sellers, representing more than 40% of the transactions, with an additional 23% attributed to investment sales conducted by U.K. institutional investors.
The most active buyers were veteran hoteliers with deep knowledge and understanding of the hotel sector in the U.K., be it focused hotel investment groups or corporate hotel owner-operators.
These investors, who were focused on active ownership and long-term value creation, accounted for 55% of deal activity in Q1, with most of the activity targeting opportunities in crucial regional destinations.
The Fattal Group’s purchase of the Grand Hotel Brighton for £60 million ($74.83 million), with an additional £16 million ($19.95 million) investment planned, and Pandox’s acquisition of The Queens Hotel in Leeds for £53 million ($66.1 million) are two instances where healthy balance sheets and divestments elsewhere in their portfolios freed up capital to help ongoing profitable and opportunistic expansion.
Operationally, the country’s hotel market continues to see strong performance, with RevPAR returning to or surpassing pre-pandemic levels driving investors. Investment in the sector was buoyed by robust levels of domestic travel, consisting of strong leisure and improving corporate demand, which often yielded longer and more profitable stays.
“With interest rates remaining high, access to finance and the cost of debt will continue to make certain investors more reticent. Yet, large amounts of capital remain to be deployed, and with investors taking a long-term view, the outlook for increasing levels of investment into the sector is positive, with potential for both portfolio and big-ticket single-asset deals to take place later in the year,” said Philippa Goldstein, senior analyst — hotels & leisure at Knight Frank.
LONDON HOTEL MARKET
The London hotel market saw five significant deals in Q1 2023. These include the £55 million ($68.6 million) acquisition of The Covent Garden Hotel by Firmdale from CBRE Investment Management, Dalata Hotel Group’s £44 million ($54.88 million) purchase of a recently-built 192-key hotel in Seven Sisters and the £42 million ($52.38 million) sale of the long-leasehold interest of the Holiday Inn Regents Park Hotel divested by CBRE Investment Management.
Despite interest rates continuing to climb and inflation likely to drop more slowly than the initial forecast by the Bank of England, investment interest in the hotel sector will remain resilient. London and key gateway cities remain the top targets of investors.
Multiple assets are presently being marketed for sale, which includes The Sheraton Grand Hotel & Spa, Edinburgh, with a guide price of over £100 million ($124.73 million) — which is set to become Scotland’s biggest single-asset to transact since 2018 — and the £450 million ($561.28 million) sale of three London-based Hoxton hotels, with Ennismore likely to retain the management.
Lucrative Home Office contracts are having a material structural impact on the country’s hotel market concerning both the occupational and investment market.
Knight Frank’s research has predicted that around 350 hotels totaling 35,000 rooms across the U.K. are being used to house refugees and asylum seekers or are commissioned to use as social housing. This drop in the market’s total capacity of bedroom stock is helping the sector’s recovery.
Meanwhile, the dynamics of the investment market are also affected by these Home Office contracts, with much lesser distressed or forced sales currently taking place.
“Having traded strongly over the past 12 months, we are beginning to see more sizeable, prime-located assets benefit from a competitive sales process, demonstrating resilience in pricing. Due to the ongoing rise in the cost of debt, the requirement for higher returns from certain buyer profiles provides an opportunity for other investors to gain a foothold into the market,” said Henry Jackson, head of hotel agency and partner at Knight Frank.
While there’s a continuing lack of distress in the market, increased activity from owners actively managing their portfolios is apparent, Jackson said.
“Owners are now more willing to realize the value of their assets, to free up capital to support the increased burden of debt, or for reinvestment through repositioning and ESG improvements, or for continued expansion.”