Sure, the UK's hotel market is facing some challenges, but it isn't all bad news. This year, the UK hotel industry is expected to present "significant market opportunities" through the break-up of portfolios and increasing sale and leaseback activity, according to research from global property consultancy Knight Frank.
“In 2016, despite emerging challenges, we expect that the hotel industry will continue to witness strong results as investors look for better returns on their investments," Ian Elliott, head of hotels at Knight Frank, said. "The investment volume pattern of the last three years in addition to an expected increase in regional developments suggests that 2016 could be another record-breaking year for the hotel industry.”
Investment volume in hotels set new benchmarks last year, accounting for 8.29 percent of total UK commercial real estate volume at £5.89 billion in 2015. The increase in hotel investment volume has more than doubled since 2013 from £2.21 billion, and represents the highest figure to date, even overtaking the previous high investment volumes of 2006. According to Savills, UK hotel investment surpassed its 2006 peak in 2015 at £8.1 billion pounds, representing a 32 percent increase since 2014.
Investors have been seeking long-term non-traditional and "defensive" asset classes. (For example, Brocket Hall in Hertfordshire was purchased by a Chinese-backed firm after going into administration last year.) Buyers now view specialist sectors as a defensive asset class that provide long, stable income flows, the report claims. Eighteen percent of all commercial property investment transactions in 2015 were in specialist property, and Knight Frank predicts that total investment into these sectors will increase by 10 percent year-on-year to reach £14.3 billion by the end of 2016.
Knight Frank is also predicting that operator consolidation will also continue throughout this year. This, the report suggests, will help keep help the industry as a whole respond better to disruptors like Airbnb and OTAs.
Who's Investing—and Where
Investors from the Asia Pacific region and the Middle East dominated the central London hotel market last year, and this trend seems poised to continue. Notable deals last year included QIA’s purchase of a majority share in the Claridges, Connaught and Berkeley Hotels in May 2015.
Rising prices and lower returns sent many investors out into the regions in 2014-2015. U.S. private equity accounted for 65 percent of all acquisitions in the regions last year. Lone Star Funds’ acquisition of the Jurys Inn portfolio was a notable example of the trend. Asian Pacific and Middle Eastern investors will also continue to show interest in these areas.