Ahead of Brexit, UK's investor profile changes

The Birmingham Metropole hotel was acquired by Henderson Park in late 2017. Photo credit: Hilton Hotels

Investor focus in the UK is shifting away from private equity to single assets in the regional market. After several strong years of transaction volumes, this could precipitate not only a downturn, but a sea change in the investor profile.

The country, which is lagging behind the rest of the European Union in terms of GDP growth, has seen a shift in investment trends, with private equity groups leaving for mainland Europe in search of better returns.

By the Numbers

Christie & Co.’s Business Outlook 2018 reported a 5.8-percent increase in average price for the UK's hotel sector in 2017, and reported that the year ended with total sales of approximately £5.3 billion, up almost 18 percent year-on-year. Sales in 2018 were expected to show a slight decline to around £5 billion, but would be in line with the longer-term average.

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The largest transaction of 2017 was December’s approximately-£800-million acquisition of the Jurys Inn portfolio, which Pandox purchased from Lone Star/Hudson. Other deals included private equity firms Bain Capital Credit and Canyon Partners’ £525-million sale of Q Hotels to investment company Aprirose in September. The family-owned Tonstate Group sold Hilton’s London and Birmingham Metropole hotels to Henderson Park for around £500 million in October, while London-based private equity real estate fund manager Queensgate Investments bought Generator Hostels, with 14 budget properties spread across Europe, for £400 million from Patron Capital and co-investment partner Invesco Real Estate.

The Brexit Effect

“The hotel market is one of the only sectors to fully benefit from Brexit, welcoming a 20-percent increase of tourists in 2017 from the previous year,” Barrie Williams, managing director of hospitality at Christie & Co., said. “Driven mainly by leisure travel, RevPAR growth is expected to increase 2.4 percent in London and 2.3 percent in the regions throughout the upcoming year. The weak pound and favorable exchange rates have boosted inbound tourism and staycations, but any further currency movement could impact the market.

“In 2017 most of our work was focused on regional, single-asset hotels valued at £5 million to £25 million, and portfolios up to £300 million, and the market has been active. Likewise, regional, single-asset, sub-£5-million hotels have been buoyant.

“The UK is pretty stable, but will lag [behind] Europe as GDP grows there, and the private equity groups are likely to go to other locations in Europe,” Williams said.

Over the past 18 months, he said, the private equity houses have been looking for better value in Europe—primarily in Holland, Belgium and Spain—where there are better returns. “In the UK, we’ve had a new type of buyer enter over the period—a completely different buyer profile, shifting to longer-term holder, family offices which are looking for a freehold which they can hold for a generation.

“If you look back 12 months, everyone was expecting the Asian investors to come in and do the deals, but the large Chinese investors have been unable to get their money out of China, and those who have been looking at sub-£10-million hotels in the regions where you can get returns of 9 percent, against 3 percent in London.”

While private equity houses were looking elsewhere, the institutions have been drawn to the UK. “The market has traditionally been viewed by investors as alternative, but is now becoming more mainstream for long-term investors such as L&G, which this year acquired the Hampton Inn Stansted,” Williams said. “Life funds are now entering the market, looking for variable income, and we see a large appetite for lease income from institutions keen on sharpening yields.

“The market is still on owner/operator and franchise models, with management contracts falling out of favor and leases in the ascendant.”

As the UK and mainland Europe manage their split, investors are also seeing the regions as two separate entities.

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.