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Written by Faisal Jumaily


It is no secret that across the globe, the Covid-19 Pandemic inflicted deep wounds upon the hospitality and leisure industry, with the topic of today’s discussion, hotels, being amongst the most heavily impacted assets.

It takes a brief thought to understand how halted international travel would have upset hotel fundamentals and market forces, both of which dictate hotel valuations and investor sentiment towards these operational assets.

But now that we’ve overcome the woes of the virus, and as we return to business as usual, investors are looking ahead to snapping up attractive deals.

What Happened in 2021?

The UK entered 2021 with nothing short of a full lockdown, which meant all but good for hotel owners, particularly the smaller independent owner-operator hotels, which make up 40% of the UK’s total hotel supply.

Whilst these under-invested hotels remained afloat prior to the pandemic, many of them were forced to close down due to the resultant effects of the health crisis. Subsequently, several hotels across the nation changed ownership for various reasons, be it defaulting on debt or investors requiring capital for use in their wider portfolio.

These exchanges shed light on the alluring opportunities the pandemic presented to prospective hotel investors keen on capitalising on distressed assets- this fuelled the £4bn of transaction volumes across the UK in 2021 (Knight Frank).

These sales occurred in staggered quarterly waves, with the full brunt of lockdown in Q1 proving the slowest period, accounting for only 13% of annual transactions. But as sentiments improved near the end of the year, investment rebounded in the fourth quarter, during which 52%, or £2bn worth, of the year’s deals, were sealed.

Activity during 2021 indicates the availability of investor capital looking to be deployed in hotel assets, raising optimism as to the liquidity and profitability of the sector. This, in turn, also encourages improved lender sentiment, funnelling further debt capital down this avenue of real estate investment.

But who are these lenders providing capital for?

International Investors, Private Equity and Family Offices- Who’s Snapping Up These Deals?

Overseas buyers proved their willingness to reach deep into their pockets in 2021, as they aggregated almost £1.5 billion of investment into the UK hotel market, 74% of which flowed straight into London (Knight Frank). This marked a huge change in investor preferences since 2019 when the majority (73%) of international capital was spent on acquiring regional UK assets instead of investing in the capital city.

Supposedly after the uncertainties suffered during the pandemic, global investors were less interested in exploring broader UK markets, rather preferring the safe-haven nature of London real estate. “Investors from abroad are currently not taking many risks. They may be making some value-add plays, but they’re mainly seeking trophy assets in prime cities within the UK/EU, where there might be an undersupply of beds” says Aman Galani, an analyst at real estate financing specialists RCP Finance.

The largest sums came in from across the pond as North America totalled 58% of all overseas capital injected into UK hotels, followed by 27% in Asia. Most notably, Singapore’s Fragrance Group purchased the giant 906-room Holiday Inn London Kensington Forum Hotel at the end of the year, which real estate fund manager Queensgate Investments had previously held.

Capital inflows from the Middle East were somewhat negligible last year, forming only 1% of all overseas investment in 2021, compared to 9% in 2019 (Knight Frank).

However, the industry eagerly awaits the 2024 opening of the Chancery Rosewood, a set-to-be world-class regeneration project of what was the US embassy on 30 Grosvenor Square. Developers Qatari Diar, the real estate arm of the Qatar Investment Authority, will add the new hotel to their portfolio of London trophy assets, alongside Harrods and The Shard.

Competing with overseas buyers are the private equity groups, who were never likely to pass up on discounted hotel prices in a turbulent market- after all, that kind of environment is where returns are made.

With a more bundled transaction style, these groups have shown their efficacy in grabbing several hotels at any given moment. Henderson Park (London), a $13bn AUM real estate manager acquired 12 Hilton hotels, while 17 Holiday Inn and Crowne Plaza hotels were added to MCAP Global Finance’s books. These deals combined accounted for approximately 44% of all private equity investments in UK hotels. 

Such asset managers continue to reassure their investors by partnering with world-class operators who can streamline the day-to-day functions of hotels, maintaining quality standards and thus strong returns.

High Net Worth Individuals and their respective family offices are more focussed on the 3*/4* hotel market, looking to optimise investments through an active asset management approach. “What’s happening at the moment is many owners in breach of their covenants and being urged by their current lenders to either pay off their debt, consider refinancing or even selling the hotels,” explained Aman.

As lenders apply increasing pressure on owners to sell, several discounted opportunities are introduced into the market, attracting interest across the HNW space. Aman continued, “We are seeing first-hand that our HNW clients are buying up these 3*/4* hotels at around 20% below market price and repositioning them into 4*/5* hotels which are fully kitted out and optimised for any additional planning.” After a couple of years to complete such schemes, investors could easier sell the asset to an institution, making 3/4x their money, or take decent income at a c5% yield for a few years and exit thereafter.

 

While pre-existing hotels are expected to be bought and sold throughout the year, there will also be high demand for non-core assets with the potential to be repurposed into hotels.

 

Outlook for 2022 and Beyond

2022 is forecasted with an even more optimistic view, as specialists project transaction volumes of £5m.

But while we forecast the above, investors must be wary of potential headwinds that may impact the hotel sector. Approaching 3 years after the pandemic, we would’ve thought that economic uncertainty would begin to fade, but in reality, it seems quite the opposite. Hotel investors are aware of the risks arising from upward pressures on wages, higher operation and energy costs, as well as the return of VAT to the pre-pandemic rate of 20%. This begs the question of the extent to which these burdens will be passed onto holidaymakers and hotel guests, especially given the already tightening household budgets. With households becoming increasingly constrained, we’d assume that spending on leisure will have to take a cut.

However, RCP Finance sees a significant rise in large hotel developments in London and the EU due to a huge increase in post-Covid demand. Five-star hotels with branded residences attract waves of demand as individuals seek luxury accommodations with access to premium amenities.

While pre-existing hotels are expected to be bought and sold throughout the year, there will also be high demand for non-core assets with the potential to be repurposed into hotels. This trend will likely strengthen near the end of this year and into 2023, particularly because investors believe the market will be at an enticing point within the recovery cycle.

“Investor demand for hotel assets will continue to be strong. While some lenders are happy to provide credit facilities, others are tentative due to their already high exposure to the hospitality sector,” says Aman. Lenders that fit into the latter category are already looking to taper down their loans to hoteliers, particularly with the concerns over increasing rates and capital costs. “Only certain lenders are willing to take on risk, and they’re still only looking for people with strong track records and large equity behind them,” Aman added.

With many lenders, including RCP Finance, predicting the Bank of England to hike interest rates up to 2-3%, there remains a lot of uncertainty from both creditors and investors. However, with disposals of hotel assets being seen up and down the nation, there is undoubtedly room for institutions and independent operators to ‘bite the bullet’ during the unsettling economic climate- they will continue to purchase these distressed assets in the hope of profitable returns.

If you’re looking to invest in the UK Hotel Market, contact us at info@falconinvestments.uk, and we will help you throughout the process, assisting with the sourcing, financing and the final acquisition.