Why hotel investors are watching Scotland

Starwood Capital has partnered with JLL in the off-market sale of its Drumsheugh Gardens hotel.
The Bonham Hotel

As we noted last week, Starwood Capital sold the Bonham Hotel in Edinburgh to an investor group led by American fund manager, Richard Driehaus. Starwood Capital acquired the property in 2015 as part of the Town House Collection. The sale, for an undisclosed fee, was done off market. 
 
The move follows a trend of growing interest from overseas investors as Edinburgh's hotels outperform compared to other cities. What’s more, following the UK general election, Scotland as a whole is viewed as more politically stable than England right now.

Why Scotland is Hot

“The vast majority of hotel deals in Scotland have been private money from overseas,” Kerr Young, director, JLL’s hotels & hospitality group, which brokered the deal, told HOTEL MANAGEMENT. “The institutions have been ignoring Scotland.
 
“When Westminster is in a state of flux, there is a lot more certainly around Holyrood [the Scottish seat of power] particularly now that [first minister] Nicola Sturgeon has said there won’t be another independence referendum. 
 
“The nature of the sterling devaluation is such that all the deals we have done, other than one, have been with overseas buyers—they understand that they can be more competitive than the domestic buyers. The majority have been in Edinburgh, which has robust fundamentals and they are looking at hotels across the board. 
 
“Edinburgh currently boasts the strongest UK hotel market outside of London, with a thriving corporate, finance, tech and leisure market, attracting 35 million visitors each year creating £1.15 billion in revenue. This combination of factors provided a compelling investment proposition.
 
“Hotel investors have not been deterred by the continual background noise of a ‘neverendum’, which has curtailed investment in other real estate sectors across Scotland. As an established leisure destination and one of the most visited cities in the UK, Edinburgh continues to hold its position as the regional UK city that tops hotel investor and brand requirement lists.”
 
During 2016, hotels in Edinburgh outperformed the regional UK, with occupancy reaching 82.9 percent, according to Hotstats. Average rates rose by 8.4 percent, to £114.15.
 
“Transactions in 2017 will generally be driven by funds reaching the end of their hold period and the subsequent restructuring of portfolios, rather than high income growth,” Young said. “Investors will continue to pursue yield, and move into more secondary and tertiary markets.
 
“Transaction structures continue to evolve, and the role and clout of private equity funds is changing. Some markets where hotel performance has turned negative will see more stress in 2017, resulting in potential opportunities for buyers. This is likely to attract opportunistic investors to the Aberdeen market following three years of double digit declines in RevPAR.”

Who's Investing?

Driehaus is not the only global buyer to look to Scotland. In May, Highland Heritage was sold to Singapore-headquartered MGM Muthu. The group includes four hotels—the 96-guestroom Royal Hotel and 132-guestroom Ben Doran Hotel, both in Tyndrum; the Dalmally Hotel in Strathorchy, Argyll and Bute; and the 66-guestroom Alexandra Hotel in Oban, and follows the purchase of Nairn’s Newton Hotel by MGM Muthu. 
 
“Considerable interest was expressed for the business and assets, which follows a pattern of increasing demand for UK provincial hotels,” Julian Troup, head of UK hotels, Colliers International, said. “We are seeing an emerging trend of increased demand for quality provincial hotel opportunities from a diverse buyer set, including international investors, who have been attracted by weaker sterling and improving trading prospects.
 
“Since the beginning of 2016, over 15 percent of UK hotel sales completed by Colliers were to international buyers.”
 
While the government in Westminster is facing uncertainty in its dealings with Europe, removal of the threat of further polling in Scotland is driving deals.
 
Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.

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