Hotel sector a robust target in the UK

The fallout from the EU referendum continues to help rather than hinder the hotel-transactions market in the UK.

Demand has remained high for assets, with good returns outside the capital. Interest has been primarily focused on cities like Edinburgh, Manchester and, increasingly, Birmingham, with only the strength of the pipeline giving some cause for concern. 

Buoyant Market

The transactions market in first-half 2018 was buoyant, reaching £3.2 billion, up 28 percent over the same period last year, according to Savills, which forecast around £5.4 billion for the full year—the same as 2017, which itself marked a 32-percent increase on the previous year.   

The market was predominantly driven by portfolio deals, which accounted for 71 percent of transaction volumes, including the £750-million acquisition of the Project Ribbon portfolio by Vivion Capital Partners. 

“A lot of portfolios were coming to market because of the traditional private equity hold cycle, after being acquired in 2013 to 2015,” said Richard Dawes, director, hotels agency, Savills. “They are leveraging the CapEx and organic growth and there has been a lot of capital chasing them, with a good buyer pool and density of buyers.”

Overseas buyers accounted for 51 percent of transactions, with Israeli and Canadian investors the most active with 24 percent and 14 percent of the investment total, respectively.

The view was echoed by Christie & Co., which reported the first half of 2018 had seen Indian, Israeli and Asian investor funds becoming increasingly active in the market, offering competition along with the usual UK and European investors.

Top Markets

Savills figures showed London hotels attracted £1.23 billion worth of investment (38 percent of the H1 total) across 11 deals with key transactions, including the sale of 5 Strand by Indian real estate developer ABIL Group for over £90m and Crosstree’s acquisition of the RE Hotel in Shoreditch. The southeast was the second most popular region, accounting for 23 percent of volumes followed by the north with 15 percent of the total.

Hotels in London recorded higher occupancy but lower rates, according to STR’s preliminary June data. Occupancy grew 2.2 percent to 86.1 percent, with ADR falling slightly behind year-over-year comparisons, dropping 0.6 percent to £160.84.

“Whilst the trading numbers are coming off the boil, real estate in London is still hard to come by and there is a diverse, capital-heavy buying community,” said Dawes, noting getting money out of China is not as much of a “stumbling block” as it was. “Investment is coming out of subsidiaries, out of Southeast Asia. There is enough equity out there to do good deals without debt.”

Edinburgh and Manchester remain popular for investment, Dawes added. “There are those who are looking for value add and those who are looking for strong trading assets. Where people are being canny is checking supply dynamics.” Farther out, Dawes sees potential for Birmingham. “People are realizing that it is still the second- or third-largest city in the UK. There is a lot of regeneration and I think it’s a really interesting market. There is a lot of product coming into the luxury and upscale sectors there.”

Jessica Jahns, head of hotels and hospitality research at JLL, echoed Dawes’ enthusiasm for Birmingham, noting the city will host the Commonwealth Games in 2022 and is set to get the HS2 high-speed-train line linking London with the north, slated to begin operations within the next decade. “University towns like Oxford, Cambridge and Bristol can attract higher rates and are attractive,” Jahns said. “Some of the yields have been sharper in London and this has meant that investors can get better returns in cities in the regions.

“We’re still seeing demand for London, but the entry price is a little high for some investors. The international investors are still interested. After the Brexit vote the pound devalued, interest rates are still low and this means that returns are better than locations such as Singapore.” 

Edinburgh, Jahns said, saw strong performance in 2017 and Manchester is still performing well. “Both have seen a slight drop-off year-to-date and both have pipelines of around 3,000 rooms, so time will tell whether the cities will be able to absorb them.”

In total, an estimated 19,000 additional rooms are due to become available in the UK over 2017/2018, according to AM:PM.

The Brexit Effect

Brexit is not seen as a hindrance, as yet. Christie & Co described the sector as “one of the few to fully benefit from the response to the EU referendum, as the decline in sterling boosted leisure travel from Europe, the U.S. and China. A weaker pound also lifted the number of staycations, which drove up occupancy and RevPAR in London and UK holiday hotspots”.

“In terms of Brexit, we have seen more appetite for the UK; we’ll see what actually happens,” said Jahns, while Dawes said it has been rare to see people selling assets due to Brexit. “Brexit creates a bit of flux, there are different opportunities; transactions happen more in this environment.”

Dawes acknowledged the rising costs as a result of the vote. “Costs are rising and people are going to be cleverer about the sectors they choose so that there is enough growth in the topline,” he said. “The cost pressures we are seeing have to be a focus for long-term owners. We are seeing a lot of money chasing the luxury space, anticipating that they can break historic rate caps, which they have in Edinburgh. If you build it, they will come.”

Funding for deals has remained easy to access. “We are seeing cash and debt, some are able to buy with cash,” said Jahns. There is currently a higher chance that they will refinance after purchase. A lot of the High Street banks still have an appetite for the sector, along with other lenders. We are going through the process of educating the institutions about the sector. 

“Leased deals accounted for 30 percent of deals in the first half of last year. There have been a lot of portfolio deals this year against last year when there were a lot of single assets," said Jahns.

Rising interest in leases also was a focus for Dawes. “There is a lot of cash in the fixed-income space and that trend is not going to go away,” he said. “Hotels provide that opportunity, which the pension funds are looking for. There are more leasehold offers, with Dalata, EasyHotel, Motel One.”

Dawes drew attention to the Principal Hotel deal, which will see IHG rebrand 12 hotels in the Principal portfolio acquired by Foncière des Régions, with IHG taking hotels onto its balance sheet, through managed leases. “In competitive markets where there are strong residential and office sectors it is hard for hotels and there you may see tenants look to key money or alternative structures,” said Dawes. “The traditional landlord/tenant relationship is evolving quickly.”

Competition remains fierce between investors for key assets. Competition to raise their flags in critical locations means that the operators also may have to prove their commitment. 

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