Knight Frank: U.K. hotel investment to stay strong in 2023

The momentum of hotel investment in the U.K.’s hotel sector is likely to become settled this year, following a turbulent 2022 that disrupted the hotel sector’s post-pandemic recovery, revealed the latest study by global property adviser Knight Frank.

Investments through 2022 remained subdued, resulting in £3 billion ($3.65 billion) of hotel deals in the country, 31% below the five-year average and 22% below investment levels in 2021. This was in sharp contrast to the robust growth and recovery of trading performance, showing the resilience of the hotel industry in the United Kingdom.

Over the last year, there has been a decrease in the volume of large assets transacted, but there has been an increase in the volume of lower-valued stock transactions, with roughly 76% of single-asset hotels transacting below £10 million ($12.22 million) at an average lot size of £4.3 million ($5.25 million).

While there was a 55% increase in regional, independent hotels transacting in the U.K., the average selling price of £7.1 million ($8.68 million) was lower than last year’s average selling price of £9.5 million ($11.61 million).

The country’s hotel industry will see encouraging momentum this year, thanks to an expected milder and shorter economic downturn and a positive trading forecast. Despite an ongoing challenging operating environment, as headwinds ease, the market for hotel assets will become more active, Knight Frank said.

Fundamentals for the country’s hotel sector will stay strong, with VisitBritain predicting 35.1 million inbound visits to the U.K. this year. Visitor numbers will be 18% higher than in the past year. This will benefit the hotels in markets with strong overseas demand, like London and Edinburgh.

According to Knight Frank, the share of transaction volumes for hotels in the alternative asset class is projected to grow this year, boosted by more stable market conditions. A greater sense of urgency is expected for investors to return to more normal levels of investment activity.

“As confidence in the direction of the U.K. economy is further restored, there will come a greater urgency and decisiveness to execute a transaction. Currently, a heightened level of price sensitivity continues, yet the lack of quality branded stock available may serve to increase competition for assets, thereby protecting or even driving-up values in the short term. Narrowing the gap between buyer and seller expectations, as well as securing affordable and sufficient debt to reach a positive outcome for both parties, remain key challenges,” said Henry Jackson, head of the hotel agency at Knight Frank.

The weight of capital looking to target the hotel industry will drive increasing deal volumes, especially in the second half of the year. There is no shortage of buyers looking for hotels that offer value-added opportunities and with several hoteliers having benefitted from strong trading off the back of a strong leisure market, more stock is expected to become available as exit strategies are deployed.

So far, there have been many sizeable hotel deals, with more than £230 million ($281.19 million) of investment.

“We do not anticipate a significant volume of distressed assets coming to the market, particularly with ongoing government contracts in place and the rebase of business rates serving to help alleviate the hike in energy costs. Hotel transactional volumes are expected to remain constrained during the first six months of 2023, buyers not dependent on debt to execute a transaction are likely to be most active. Those deals which do complete are likely to be from buyers often driven by emotive reasons, or familiar with the market and consider there to be a long-term play,” said Philippa Goldstein, head of hotel research at Knight Frank.