Overseas investors drove UK hotel sale volumes in 2017

Clayton Hotel Cardiff, Wales. Photo credit: Dalata Hotel Group (Clayton Hotel Cardiff)

Overseas investors drove a 32-percent boost in UK hotel transactions in 2017, pushing transactions to a total of £5.4 billion. Savills data show overseas investors accounted for 51 percent of total volumes, spending close to three times the total spent in 2016 thanks to the weakened pound.

U.S. and European investors had the most investment activity last year, spending £682 million and £763 million, respectively. However, only a small number of hotel sales generated these totals. Two of these transactions include Sweden's Pandox AB's acquisition of the Jury's Inn portfolio for £680 million and Ashkenazy Acquisition's purchase of the JW Marriott Grosvenor House Hotel in a £675-million deal. 

Asia-Pacific investors were the most active in terms of deal count. Buyers from the region performed a total of 20 acquisitions valued at £446 million in 2017. Singaporean investors led activity for the region last year, spending £315.3 million in 15 transactions. Meanwhile, Indian investment picked up speed with six transactions totaling £28.9 million.

While London has historically been a primary focus market for investors, many buyers turned to regions due to their greater availability and lower pricing pressures. About two thirds of overseas investment occurred in the regions. Manchester was the top city for regional investment last year with a total of £178.6 million in investments made in the city. Overseas investors contributed to 82 percent of this total. 

Limited Supply Leads to Investment Opportunities

Constrained supply in the market along with uncertainty surrounding the Brexit vote drove many investors to seek out leased hotels. These acquisitions totaled £602.6 million—a 39-percent boost from 2016—while deal counts grew 40 percent. Two examples of these transactions are Dalata's sale of the Clayton Hotel Cardiff and the 20 Travelodge Hotels acquisitions in 2017, which doubled those recorded in 2016 and reached £236.3 million. “2017 was a watershed year for leased investments accounting for over 35 percent of total sector deal volumes. This trend is set to continue driven by the weight of the capital, both domestic and overseas, coupled with a growing tenant pool and healthy development pipeline," Richard Dawes, Savills Hotel Agency, said in a statement.  

These availability pressures have also led investors to seek other investments opportunities in new hotel concepts, especially in leased service apartments and hostels. With a growing global "youth" traveler market and the under-supply of hostels in the UK, investors are looking to maximize the yield and margins from a single room and lower operating costs. Queensgate capitalized on these factors in 2017 through its acquisition of hostel owner and operator Generator Hostels in March for €450 million. Meanwhile, Dutch brand The Student Hotel is looking for expansion opportunities in the U.K. The brand, which combines the concepts of hotels, hostels and student housing, offers flexibility and revenue potential. 

Maximizing Revenues

Operational revenue was high in the UK last year. However, inflationary pressures, the introduction of the living wage and the business rate revaluation are all putting pressure on margins. In response, many hotel operators are turning to under-utilized spaces of their properties generate additional income. Some of these methods include developing attractive F&B facilities with street frontage, establishing joint ventures or leases to third-parties to develop more casual dining options and integrating co-working facilities. Two examples of these include the Starbucks sites in the Village Hotels and Accor's JV with Bouygues last year to develop co-working spaces. 

Savills predicts that UK's exit from the EU may generate a more structural margin issue from staff availability and costs. According to anecdotal evidence, staff availability has already become an issue. According to data from the UK's Office of National Statistics, 4.5 percent of total hospitality industry jobs are vacant. Hotel operators are looking to technology as a potential solution by reducing the number of staff with more guest facing and back-of-house functions. These include self-check-in desks, laundry RFID tracking and employee IoT smartwatches for real-time access to property management systems. 

UK Outlook for 2018

Operational performance at UK hotels scored a significant boost thanks to the weakened pound last year. The drop enhanced tourist's attraction to the UK. Overseas tourist arrivals in the UK jumped 7.5 percent during the 12 months to October 2017. RevPAR in 2017 grew 4.4 percent and 12.4 percent in London and Edinburgh, respectively. However, occupancy dropped in late 2017 on a year-on-year basis, despite steadying hotel rates. This showed the effects of Brexit are starting to wane. Savills predicts this will not disrupt tourist demand for the UK, but it is a return to "normal" levels of growth going into 2018. 

Savills forecasts the UK's development pipeline, especially in London, will impact operational performance. However, RevPAR growth is expected to continue for London and the regions.

The group also predicts corporate demand will rise in 2018 from the regional markets. Brexit worries from the corporate sector drove domestic visitor demand down last year. Many of these companies reduced corporate travel to minimize costs. Domestic business stays dropped 5.3 percent year-to-date as of October 2017, compared to the same period in 2016, pushing RevPAR down in more corporate reliant markets, like Leeds and Bradford. Despite the declines, a KPMG CFO survey reported that corporate confidence began to improve near the end of 2017. 

Investor appetite is expected to continue throughout 2018, especially from overseas investors' interest in the UK's regions. However, low stock availability can potentially negatively impact transaction volumes. Savills predicts regions will continue to dominate investment activity this year with its greater stock availability than London's, but even these regions may see fewer assets going on sale.