Investors look to diversifying Aberdeen

The Holiday Inn Aberdeen West was acquired by Cairn Hotels last July for an undisclosed fee. Photo credit: InterContinental Hotels Group.

Thanks to recovering oil prices improving overall business, Aberdeen, Scotland, has seen a “healthy mix of appetite” from investors in recent years.

The city was expected to see demand for its rooms diversify from 2019, when a series of infrastructure projects were due to be completed. 

Aberdeen has seen four years of falling RevPAR, but the tide seems to be turning. According to the Q3 2017 study from AM:PM, STR, AlixPartners and HVS, Aberdeen had reported an eleventh consecutive quarter of falling RevPAR, but the decline of “only” 1 percent suggested that the city may have hit the bottom. 

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“With oil prices increasing, there may be light at the end of the tunnel for Aberdeen’s long-suffering hoteliers hoping for workers in the industry to return to the city,” the company said in the report. “However, a significant active pipeline in the city (10 percent of current supply) is likely to continue causing concern.”

The slump in oil prices hit the city’s hotels. Last March, the Holiday Inn Express City Centre and Holiday Inn Aberdeen West hotels went into administration.

“As the Aberdeen market recovers with the strengthened oil price, the strategic locations of both assets will allow incoming investors to grow revenue through strategic investment in the assets and capture the pending recovery of the wider macro economy,” said Neil Milligan, associate, JLL’s Hotels & Hospitality team. “Despite the recession experienced by the energy sector that has impacted on Aberdeen hotels, the city remains a target for investors keen to enter this corporate driven market that has historically achieved some of the strongest RevPAR growth outside of London.”

Milligan’s confidence was proven, and the two hotels were acquired by Cairn Hotels last July for an undisclosed fee, retaining the InterContinental Hotels Group branding. 

Last year, hotel investment volumes in the city reached £12.25 million across three deals following a year of inactivity in 2016. Today, bargain hunters are carefully eyeing the market, and Savills suggested that this trend would continue to build momentum in 2018.

Diversification

In its Aberdeen Hotel Spotlight, the London-based real estate company suggested that Aberdeen would see RevPAR move into positive territory in the second half of 2018 for the first time. Recent growth in the oil price was expected to drive performance growth—but the city has also been making efforts to diversify away from reliance on the oil sector. These have included the development of the £335-million Aberdeen Offshore Wind Farm, with the first of 11 turbines having been installed in April 2018. Efforts were also in place to increase Aberdeen's conference and leisure offering. 

“There is a healthy mix of appetite, not just solely focused on the budget-end,” said Steven Fyfe, associate director in the hotels agency at Savills. “We view the Holiday Inn Westhill as a full-service offer. As is the Mercure Ardoe, that transacted across 2017/2018.”

The stabilizing market has seen a number of the brands move into the Granite City, with new openings including a 200-room Hilton Hotel.

Savills said there were already 50 golf courses located in the area and the new Exhibition and Conference Centre, due to open in 2019, was expected to attract 4.5 million visitors in its first six years. Complimenting this was the £20-million expansion to Aberdeen International Airport, increasing terminal capacity by 50 percent upon completion in 2019, and the £350-million expansion of Aberdeen Harbour.
 
“While there has been a historical dominance and reliance on the oil industry, there are efforts to diversify Aberdeen's economy and this will prove positive for hotel operational performance over the longer term,” Fyfe added, noting that this was likely to kick in next year, when the infrastructure projects and the AECC were completed.

With diversity coming into demand in a city that had been dominated by independent hotels driven by the oil trade, Aberdeen is likely to be able to avoid suffering the highs and lows that have typified trading. 

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