Brexit uncertainty threatens UK development

Arora Group's dual-branded Heathrow Terminal 4 airport hotel has entered the final stage of construction. 
Holiday Inn Express London-Heathrow Terminal 4, UK
Image: Arora Group

Hotels in London recently reported their highest RevPAR and ADR in an August since 2012, when the capital hosted the Olympics.

Despite growth in London, insiders have expressed concern that nervousness around Brexit was likely to drive a two-year investment environment, as investors seek “blue chip” locations to secure development financing.

London's Numbers

According to STR’s preliminary August 2018 data for London, ADR was up 2.5 percent to £145.45, with occupancy increasing 5.6 percent to 86.8 percent. RevPAR rose 8.2 percent to £126.29.

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The UK hotel-transactions market remained strong, reaching £3.2 billion, up 28 percent over the same period last year according to Savills, while financing for development looked to be under pressure. According to a study by Knight Frank, development deals in London fell 40 percent in 2017.

Marc Finney, head of hotels and resorts consulting at Colliers International, said financing increasingly was available only for “blue chip” locations. 

“The lender universe for hotel development finance is smaller than that for other real estate asset classes and risk appetite varies significantly across High Street lenders, secondary and challenger banks and non-bank lenders such as insurance companies and credit funds,” said Chris Gow, head of debt advisory at JLL. “This allows us to create a range of leverage attachment points for clients and, given the increased number of credit funds active in the UK, it is possible to find suitable lenders for most development opportunities.  Alongside location, lenders focus heavily on the experience and track-record of hotel owners, managers and brands as the most important factors in determining credit appetite.

“Most development lenders focus on city-center locations or other sites where typically more predictable, dual-supply business and leisure revenues can often be generated. We are currently seeing strong levels of financing activity across the UK and have either closed or are closing transactions in locations such as London, Edinburgh, Cambridge, Glasgow and Manchester.”

In the wider real estate market, at the beginning of September real estate investors met in Paris for the Europe GRI, debating Brexit and whether it was time to sell or double down assets in the late game and which countries might benefit from a hard or soft Brexit—debating risk-adjustment strategies for real estate as a consequence.

The GRI concluded that while it was clear the threat of a Europe bubble still loomed, the continuing rise of populism and the exit of global capital worried most. However, for most investors leaning on their past experiences from 2008, it was felt with every inevitable turn of the cycle, opportunities always sprang from distress.

Brexit Concerns

Uncertainty over the UK’s exit from the European Union, due in March, has been driving investors’ concerns. 

On September 17, the IMF said it expected Britain’s economy would grow about 1.5 percent a year in 2018 and 2019 if a broad Brexit agreement was struck, compared with about 1.75 percent if it had stayed in. IMF managing director Christine Lagarde said that a “no deal” exit would see a contraction of the economy. 

“Uncertainty about the future economic environment has weighed on investment, despite still-robust global growth and easy financing conditions, while the post-referendum depreciation of sterling has depressed real income growth and consumption,” said Lagarde. “A more disruptive departure will have a much worse outcome. Let me be clear: compared with today’s smooth, single market, all the likely Brexit scenarios will have costs for the economy and, to a lesser extent, for the EU."

The larger the impediments to trade in the new relationship, the costlier it will be, Lagarde added. “This should be fairly obvious, but it seems that sometimes it is not.”

The UK housing market already has seen an impact, with the price of an average house growing 3 percent to the end of June 2018, down from 8 percent in the year before the EU referendum, according to figures from the Office for National Statistics. 

Bank of England governor Mark Carney warned that British house prices could fall 35 percent if the UK leaves the European Union next year without a divorce deal.

While investors waver, existing real estate is likely to be of greater interest than backing projects which will take time to stabilize and time until beds can be filled. The pressure on politicians to end this state of uncertainty continues. 

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

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