Defying Brexit concerns, London deals pick up steam

Hard Rock Hotel London
Hard Rock Hotel London. Photo credit: Hard Rock Hotels

What Brexit? London has gone from seventh place to take the crown as the most attractive investment prospect for hotels worldwide, according to Cushman & Wakefield—defying fears of a Brexit-based downturn. 

Transaction volume in the capital doubled as a result of a number of large deals, raising questions about whether the market has the supply to sustain interest. 

Deal Rankings

The UK capital narrowly outranked New York at the top after overall investment into American cities fell 21 percent due to a cooling of capital flows into the region from Hong Kong and mainland China, according to the Cushman & Wakefield report. Asia Pacific and the Europe, Middle East and Africa region both saw hotel investment growth 28 percent to $14.89 billion, and 15 percent, to $25.91 billion, respectively, driven by the rise in tourism and changing consumer habits.

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The top 10 cities for hotel investment were London ($3.27 billion); New York ($3.12 billion); Tokyo ($2 billion); Washington, D.C., ($1.92 billion); San Francisco ($1.65 billion); Phoenix ($1.47 billion); Las Vegas ($1.44 billion); Los Angeles ($1.43 billion); Paris ($1.36 billion) and Dallas ($1.35 billion).

“London as a destination ranks in the top three choices when one is considering global expansion,” the report claimed. “This is an exciting opportunity for us as Trafalgar Square is a globally recognized location and has the potential to build a world-class luxury hotel.”

London's Deals

More than 10 deals were signed in the first half of the year, including the sale of 5 Strand by real estate developer Abil Group for more than £90 million. Abil was planning to redevelop the property into a five-star hotel with 210 to 230 rooms, with an additional investment of over £80 million.

Other deals include the RE Hotel in Shoreditch, which was bought by an affiliate of Crosstree Real Estate Partners and will be converted into the UK’s first Mama Shelter. Since the end of the second half, both The Curtain hotel and the Beaumont also have been sold, both to domestic investors. 

“London has battled through political headwinds to charm both hotel investors and consumers,” said David Hutchings, head of investment strategy, EMEA capital markets at Cushman & Wakefield. “Its rich culture, history and leisure scene, alongside its business operations, is proving to be a solid bedrock for its hospitality sector, which continues to go from strength to strength.”

“We are seeing an increasing diversity amongst the type of investors coming to play, including institutional investors, whose presence in the market is reducing the risk profile and driving a surge in liquidity,” said Jon Hubbard, head of hospitality EMEA, Cushman & Wakefield. “Their presence is encouraging a resurgence in operating leases and the continued expansion of white-label companies. This, in turn, has encouraged some major operators to reconsider leases for strategic situations. There is also an increasing appetite from institutional buyers to consider leases with some element of variable income, to drive upside potential and high returns.”

Hubbard said he was confident London could continue to meet demand. “London has one of the most developed hotel markets in the world with some 140,000 hotel keys across over 1,600 hotels giving a depth of investment opportunities from luxury to economy hotels. Add to that an active supply pipeline, with a further 90 hotels and 10,000 bedrooms either under development or due by 2020, London looks capable of sustaining the high levels of global investor interest.”

As we reported last month, although the pipeline is strong, doubts are starting to be cast on funding for development. While the UK government continues to negotiate with the European Union, there is uncertainty that may yet make itself felt in the pipeline. But for now, it is business as usual. 

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

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