Investors turn their attention to areas outside the UK

European investors in the hospitality space are readjusting and chasing opportunity outside the UK.

With CBRE Hotels reporting a decline in UK transaction volumes in the third quarter, investors are increasingly turning an eye to stability in Germany and opportunity in Italy

Still, the UK, especially outside London, is showing resilience. While UK hotel investment transactions in the first half of 2016 declined compared to the same period in 2015, it was the regional UK market that secured the vast majority of total volumes at around £1.1 billion, according to JLL. 

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“As corporations expand their headquarter reach beyond London and the UK becomes a more affordable and accessible place to visit for overseas tourists from China and the U.S., we are seeing strong growth in the hospitality sectors across the UK regions,” said Kerr Young, director of JLL’s hotels & hospitality group. “London has long been a focus for hotel investment, but now the regional market is witnessing the benefit of interest from overseas investors following the weakening of the pound. Despite initial uncertainly in the immediate aftermath of the recent EU referendum there is positive story around the UK in terms of macro-economic stability and a transparent transactional environment.”

Recent deals include the acquisition of the Premier Inn, Morrison Street, Edinburgh by Israel-based Leonardo Hotels and the purchase of the Glasshouse, Edinburgh by Malaysia-based YTL Hotels. Hyatt also recently sold the Hyatt Regency Birmingham to United Arab Emirates-based Bin Otaiba Investment Group.

Jeremy Jones, head of brokerage-hotels at Christie & Co, which recently sold Mercure hotels in Hatfield Oak and Bowdon, said that the deals provided “yet more evidence that the demand for profitable regional UK hotels remains strong. Purchasers with strong equity positions and access to competitive debt packages are struggling to secure suitable targets. When we bring suitable hotels to the market, we are experiencing highly competitive bidding processes which has increased sales proceeds.”

Savills also commented on the regional market and identified the EU referendum as a pivotal moment. The company said that it had seen growth in appetite for leased assets, with leased deals accounting for the largest portfolio of transactions volumes for the period. Institutional funds, meanwhile, were the biggest buyers. 

“Investor confidence, on the whole, has softened in the wake of the Brexit vote,” the Savills group said. “Previously, this level of uncertainty may have resulted in a retrenchment to London. This has not been the case over the last two months. Rather, the ‘flight to safety’ is being determined by income rather than geography alone.”

Mixed Data

UK commercial property values slipped in September—but at a slower pace than in July and August, according to the IPD real estate index. Overall property values for UK commercial assets fell 0.21 percent in September, following a 0.65-percent fall in August, and a 2.8-percent fall in July.

Concerns remain that performance in the UK regions may founder should the economy start to flag. These concerns are driven by fears of inflation as the weak pound drives up the price of imports.

Following the EU referendum, PwC has revised its outlook for the year, taking its prediction for London down from 2.3 percent to 1.9 percent and keeping RevPAR growth of 4.2 percent flat for the provincial UK. “While we remain positive we are less optimistic than we were a few months ago,” the company said. “We acknowledge that there are reasons to be both fearful and cheerful with considerable uncertainty and risk. The UK economy has slowed and our projections have been revised down to reflect this.”

“While the full impact of the UK vote to leave the EU will not be known for some time, economic growth is expected to slow,” David Trunkfield, PwC, UK head of hospitality & leisure, said. “A weak pound should provide a boost to inbound leisure travel, but security concerns, tight corporate travel budgets, above average supply growth (especially in London) and consumer and corporate uncertainty could create an unfavorable backdrop.”

As the pound continued to fall, BNP Paribas Real Estate Germany reported a “distinctly lively” third quarter in its domestic market, with the upswing in hotel transactions continues, generating £2.96 billion to set a new record.

“Despite the ongoing shortage of supply, which has prevented an even higher volume, the German investment markets remain in peak form, something underlined by the undiminished strength of demand,” Piotr Bienkowski, CEO of BNP Paribas Real Estate Germany, said. “In spite of very tough competition, reflected by a further rise in prices, investor interest is unabated and is in fact tending to increase.”       

Figures provided by CBRE Hotels showed a 7-percent fall in transactions volumes year-to-date for the third quarter in Germany, against a 77-percent fall in the UK. In France, where the market has seen performance numbers fall as a result of terrorist attacks both in France and the nearby regions, transactions volumes have fallen by 48 percent.

Joe Stather, CBRE Hotels intelligence manager, EMEA, said that the company’s German team had not expected the deal volume for 2016 “to be anywhere near that recorded through 2015. However, there has been such appetite for the market and it’s stability in the wake of Brexit. Record-low yield levels in Germany are also testament to this.

“The deal volume for Ireland is down marginally year to date, but the depth of bidders on assets that have come to market would again suggest an increase in appetite post-Brexit.” 

For the third quarter alone, transactions totaled €285 million, coming up hard against €305 million in the UK (and a total of €856 million in Germany). For the year to date, transactions in Germany reached over €2.8 billion, with the UK second at €1.6 billion, illustrating the drop-off between the second and third quarters. 

Italy, which has seen growing interest, recorded a 71-percent increases in volumes for the year-to-date and is up 106 percent for the quarter, year-on-year. 

Edward Rohling, CEO, TRC Hotel Advisors, who has been working in Italy, said that the market was ripe for private equity and other funds who were willing to take risks for greater returns, despite concerns over the country’s financial stability. Italy is ripe for branding, he said, with increased interest in third party management companies such as Interstate. 

For investors, the figures suggest that those seeking stability are heading to Germany, whereas those with appetite for risk are looking at Italy. As in politics, the UK must now work out its own path. 

Katherine Doggrell is an editor at UK-based news analysis service Hotel Analyst.

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