2015 was a big year for London, and for the U.K. as a whole, with strong occupancy and revenue per available room numbers attracting more buyers and commanding higher prices for hotel transactions. Here’s a look back at how London fared throughout the year, and a look at why some buyers are turning to smaller cities and towns to get a foot in the proverbial door.
By the Numbers
Data compiled by London & Partners and AM:PM late in the year suggest that the number of hotel rooms in London is expected to grow by 12 percent over the next three years, with the increase driven by the growth of budget and five-star hotels across the capital. These new properties and hotel extensions will add 17,769 more rooms across the capital over the same period, up from the current figure of 138,769.
The data further indicated that 43 budget properties are expected to open by the end of 2018, with low-cost properties in the city predicted to increase by 29 percent during that time. By 2018, 19 five-star properties will also open in the capital, increasing the hotel stock in this category by 22 percent.
Many of the buyers and holders of luxury hotels in London are not traders, Nick van Marken, global head of hospitality at Deloitte, told Hotel Management, but wealthy investors who believe that holding high-profile assets is a sound financial strategy. Private equity investors, he said, would expect a three- to five-year hold and then trade the asset or extract their investment. “The type of buyers you have at the top of London’s market are not seeking that,” van Marken emphasized. “They are seeking to preserve their wealth, and London is a safe haven.” With that in mind, he said, Deloitte expects capital flows to remain strong.
London’s luxury segment has seen little “marked decline” in values in recent years. “As a result, the reality is that if you put your money into five-star hotels in London, you’re almost guaranteed to see an improvement in capital value.”
The Biggest Deals
While small transactions were fairly constant throughout the year, London also saw quite a few major deals (and potential deals) in 2015. In the spring, U.S. private-equity firm Carlyle Group sold two London properties—Ludgate House and Sampson House—for a reported £308 million to Singapore-listed Hotel Properties Limited.
In the summer, Indian billionaire Yusuffali Kader, who heads Abu-Dhabi based Lulu Group International, acquired the Great Scotland Yard Hotel, which is currently in the process of being converted into a luxury hotel by Galliard Group, for £110 million. Kader will reportedly take ownership of the project once Galliard has finished building the hotel. Galliard bought the 125-year lease for the Edwardian, grade II-listed building in 2013 and construction of the site is about one-third complete. Advanced talks between Lulu and Galliard began in April.
In October, the Kensington Close Hotel went on the market for an estimated price of more than £350 million. Savills and CBRE were appointed to sell the hotel.
In November, AXA Investment Managers-Real Assets committed, on behalf of a U.S. pension fund, to the acquisition of the shell and core from the Berkeley Group, and to undertake the fit-out of a new hotel complex in central London, representing a total investment of an estimated £90 million. Construction of the hotel is already under way, and shell-and-core delivery is planned for early 2018.
That same month, Meadow Partners and Roquebrook signed a deal with InterContinental Hotels Group to open the Hotel Indigo London – Aldgate. The 207-room hotel, slated to open in 2017, will be located in Aldgate place, east of the City of London, and will be the first Indigo in the area.
At the end of the year, London-based developer Urban&Civic signed a franchise agreement with Hilton Worldwide to open a Hampton by Hilton hotel at the Stansted Airport. Urban&Civic secured planning permission for the hotel following a deal to acquire the two-acre site from the property division of Stansted’s owner, Manchester Airports Group. The hotel is part of MAG’s £260 million investment plan to attract more passengers and airlines to Stansted. Construction is expected to begin by the end of the year and the hotel is poised to open in the summer of 2017.
Why Investors are Looking Beyond London
London didn't have all the action, of course. Some prime deals were found in the country’s smaller cities and towns. Throughout the country, boutique and independent properties went up for sale at affordable rates, offering investors a chance to start small before trying for London or one of the country's other large cities. There's a good reason for this: The cost of real estate in London may drive away all but the biggest investors, and by turning attention to other cities and the countryside, investors may gain a strong foothold to build a presence.
Thai property tycoon Khunying Sasima Srivikorn recommended the United Kingdom as the best location for offshore property investment after seeing a double-digit yield from a hotel investment in Reading, a large town in Berkshire.
According to PwC's U.K. Hotels Forecast 2016, cities in the U.K. (excluding London) have seen a "very good year to date," with solid growth in many areas. As of October, PwC expected 1.6-percent occupancy growth in the regions for 2015, taking occupancy to 76 percent and room rate growth of 4.6 percent, taking rates to £67.
PwC also forecast further growth in 2016: A 0.6 percent gain is set to take occupancy to 77 percent—its highest level ever—while room rates are set to hit £69. Currently, demand continues to outpace supply growth, but supply continues to increase and above average growth is expected in 2016.