Hotel transactions in the UK totaled £3 billion ($3.62 billion) in 2022, a 27.5% decrease from 2021.
Slowing activity was driven in part by macroeconomic conditions in the second half of the year, according to international real estate advisor Savills.
While the momentum from Q4 2021 continued into 2022, hotel investment was strong in the first half of the year, accounting for 68% (£2.1 billion/$2.53 billion) of total annual investment, according to Knight Frank. But uncertainty caused by the war in Ukraine and domestic political turmoil slowed hotel deals throughout the year.
High energy costs, increasing payroll and other operational costs, higher interest rates, which impacted the cost of debt, and the growing threat of recession contributed to reduced levels of investment in the latter half of the year, Knight Frank said.
Notable deals included Tristan Capital Partners acquisition of Point A Hotels from Raag Hotels for approximately £420 million ($507 million), Fortress Investment Group’s acquisition of Prem Group and KSL Capital Partners acquisition of The Pig Hotels Group from Home Grown Hotels, both deals for an undisclosed price.
Activity outside of London was relatively more resilient, driven by the staycation market, with year-end volumes of £2 billion ($2.41 billion), down 2.1% YOY, per Savills.
“2022 can be summarized as a tale of two halves where volumes in the first half were up 16.9% YOY and 61% lower in the second half of the year YOY, as rising debt costs and a weakening economic outlook caused activity to slow,” said Rob Stapleton, director, head of UK Hotel Capital Markets at Savills.
The subdued investor sentiment contrasted with the strong growth and recovery of hotel trading performance in 2022, reinforcing the resilience of the hotel sector in the U.K.
The pandemic has been an accelerant of structural change, with over 19,000 rooms permanently closing over the past two years, according to Knight Frank. Combined with slower growth in the hotel development pipeline, this has created a favorable backdrop for future investment. The sector is now in a strong position to navigate the current headwinds and macroeconomic uncertainty.
While the second half of the year was challenging in terms of transactional activity, stability has started to return to the market, Savills said.
“There are approximately £500 million ($604 million) worth of hotel assets expected to complete in January that we are aware of, which would be a positive start to the year and marks the intentions of investors as they look to deploy capital into attractive opportunities. Additionally, the Business Rate revaluation that comes into effect in April 2023 will provide some respite to hotels,” said Tim Stoyle, head of UK Hotels at Savills.
Despite the anticipation of distressed sales in 2023, the ongoing availability of Home Office contracts continues to provide some hotel owners with attractive short-term income streams, materially affecting the likelihood of certain hotels coming on the market.
Subdued levels of stock will become available in 2023, increasing competition for assets, but there will be a revival in the number of hotel portfolios being marketed next year, predicted Knight Frank. Different approaches to the marketing of these portfolios are likely, however, depending upon their size and makeup.
“Once the economic picture is clearer and the availability of debt recalibrates, we expect transactional activity during 2023 to rebound at a more buoyant pace, exceeding 2022 levels. With hotel property offering value and resilience relative to other real estate asset classes, a wide range of investor types will seek to deploy capital into the sector,” said Henry Jackson, partner and head of hotel agency at Knight Frank.