Manchester market luring investors; £115M snags Midland Hotel

Cindat and Aprirose are in talks to acquire 50-percent stakes in the hotel portfolio worth over $660 million.
The Midland, Manchester, UK exterior. Photo credit: QHotels

While London is an evergreen destination for hospitality investors, other UK areas have attracted significant interest from global buyers in recent years. Manchester, the third-most visited city in the UK after London and Edinburgh, has seen a major uptick in deals over the past two years alone, and an agreement signed earlier this month surpassed the city's total for all of 2016.

Pandox's Big Buy

Earlier this month, Stockholm-based Pandox AB entered into an agreement to acquire the 312-room Midland Manchester for £115 million. Real estate investment company Aprirose acquired the hotel in September last year when it acquired Morley, UK-based QHotel Group.

The transaction was made with Fattal Hotels Group as operating partner whereby Pandox, following a legal reorganization, will retain the property and the hotel operations will be transferred to Fattal. The hotel will be operated by Fattal under a 35-year, revenue-based lease agreement in which the tenant will be responsible for maintenance, repair and investments in the property. A joint-investment program of £11 million is set to get underway. Pandox’s share is £6 million for product development, primarily for rooms and bathrooms, as well as an upgrade of the hotel’s technical standard.

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The acquisition is expected to be financed by a new bank loan and existing credit facilities, with the deal slated to close by year's end. For 2018, it's anticipated the hotel will contribute the equivalent of approximately SEK69 million in rental income and SEK66 million in net operating income on an annualized basis.

“The acquisition of The Midland Manchester is industrially sound and meets all of Pandox’s acquisition criteria,” said Anders Nissen, CEO of Pandox, in a statement. “The hotel, which has iconic status in Manchester, is an upper-premium, full-service hotel with a very attractive central location and demand from all client segments. The hotel offers clear potential for increased revenues by upgrading the room product and by increasing the number of rooms. After the acquisition, Pandox will own two hotel properties with strong central locations in a city [that] is the economic and cultural nexus in one of the fastest growing regions in the UK.”

Manchester's Appeal

Pandox's willingness to drop such an amount on a single asset makes sense given the current strength of the overall British economy, especially in the hospitality sector. 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.  

“Most development lenders focus on city-center locations or other sites where typically more predictable, dual-supply business and leisure revenues can often be generated,” Chris Gow, head of debt advisory at JLL, said last month. “We are currently seeing strong levels of financing activity across the UK and have either closed or are closing transactions in locations such as London, Edinburgh, Cambridge, Glasgow and Manchester.”

The city's growth has been gradual, indicating long-term strength—another positive factor for investment. Manchester was second only to London in terms of investment volumes in the UK last year, Savills reported, and that has yield-seeking investors chasing deals in the city. Nine deals totaling £178.55 million were signed last year, more than double Manchester’s £83.1 million total in 2016. 

As noted earlier this month, Manchester holds the highest total of new rooms in the pipeline after London, with an impressive 2,895 expected. And that new supply is meeting demand: In 2017, Manchester Airport served approximately 28 million passengers, and is reportedly the third-busiest in the UK and the largest outside the London region. The city saw a 10-percent increase in international visitors in 2017 with 1,319,000 tourists compared to 1,191,000 the previous year. More important, these visitors brought nearly £670 million to the city's economy last year, an increase of £193 million from 2016.

And with staycations on the rise, the city's burgeoning population also helps boost demand for new room supply. Manchester is right in the middle of one of the UK's fastest-growing regions, with close to 3 million people living in the greater city area and another 7 million within a one-hour commute.

All of this points to a bright future for the northern city, and while the next deal may not reach £115 million, demand is making all current supply much more valuable.

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