The past few weeks alone have seen numerous UK hotels snapped up by eager buyers. Vine Hotels, the Inn Collection Group, and Crieff Hydro have all extended their portfolios since the start of August. Yet, the sector continues to be blighted by travel restrictions and staff shortages, begging questions of who is driving this M&A activity, why are they, and how long will it last?
To emphasise the extent of the recovery in transaction activity across the UK, figures can be taken from long before August 2021. According to research conducted by Savills, the first half of 2021 saw UK hotel investment volume reach £1.7bn from 59 deals. While this remains under the five-year average of £2.43bn, the figure represents a 135% spike from the previous six months.
“The first half of this year has been positive,” says James Greenslade, director of hotel capital markets at Savills. Greenslade then pushes that the “significant” increase in transaction activity is for now “being driven predominantly by regional activity” – with 78% of transactions in H1 coming from regional assets as opposed to London.
Vine Hotels’ Handsworth deal, the Inn Collection Group’s York entry, and Crieff Hydro’s Loch Earn expansion support the notion of regional strength, but are these acquisitions all taking place at the hands of aggressively expanding hotel groups? For Greenslade, it’s actually occurring “across the board”.
“We’ve seen a good number of private equity-led purchases, both on an individual asset and portfolio basis,” he says. “But alongside that, we’ve seen good appetite from high net worth individuals and entrepreneurial buyers who are pretty sector agnostic, and are probably being attracted by the possible returns.
“We’ve seen some institutional deals starting to come through, although those have been more muted, and we’re starting to see a return of the overseas buyers. Obviously, the limitations on international travel curtailed this earlier in the year, but we’re now in progress with some international buyers on opportunities.”
So, just what is attracting this well-rounded return to hotel M&A activity? Greenslade claims that the general consensus from those buying assets in the regions is that “there’s going to be a broader, longer-term uptick in domestic demand for staycation holidays”. Staycation availability fell to just 7% in July, according to hotel booking platform Hoo, and Greenslade reiterates that those in the sector feel “the general trend is going to be for more domestic holidays going forwards”.
Yet, much like the range of those interested, the reasons for attraction are far from binary. Greenslade adds: “If you also look at the general low interest rate environment, the stock market volatility, the historic capital returns that have been delivered by hotels, and also the income that’s been delivered by them as an asset class, I think people are buying into that pricing in that future growth as well.”
While depressed prices following the pandemic leading to higher returns on investments can be assumed as a natural factor of the M&A uptick, Greenslade argues that Savills has “not seen the prices revised to the extent the market thought they might be earlier last year”. Perhaps, then, the fact that pricing has not been “chopped off at the knees” gives further strength to the pull of the staycation boom and the belief in a return to strong capital gains in the UK hotel industry.
With current trends established, what’s next for the hotel industry? Greenslade talks of the “awful lot of capital that needs to be deployed”. Evidently, investor interest in the sector is high, and with a strong pipeline of deals lined up for Q3 and Q4, the second half of the year could “mirror that increasing activity” seen in H1.
Administration buyouts as a result of withdrawing government support measures have been billed across many industries as a certain trend of the coming months. Although Greenslade recognises that “there will be more insolvency led opportunities coming into the market”, he claims that this may not occur until “the early part of next year”. In fact, he adds that for some asset classes and locations, “the strength of domestic demand will have helped stave that off entirely”.
For Greenslade, a key area of interest to keep an eye out for is the debt environment. He says that the owner operated groups who would have traditionally upscaled by recourse to debt are “still less active than they usually would be”. However, Greenslade adds that “we’re just starting to see the green shoots of the high street returning to lending at a level which is at a slightly lower gearing and higher debt coverage margin than it was previously”.
He continues: “We’ve started to see over this year, and the latter part of last year, some other challengers stepping into that space. So, I think it’s a question of watching that area because if fundability for deals is going to be key going forwards, it’s going to be interesting to see what happens if and when banks return to supporting new business.”
By no means has transaction activity in the hotel industry surged beyond pre-pandemic levels. The sector is still reeling from the previous 18 months. However, the recovery is strong, and essentially is coming from all angles. Buyers may be eyeing a cheap deal with high returns in some cases, but in many the capital gains associated with hotel investments is pushing strong prices regardless of potential insolvencies as businesses are weaned off of government support measures.
The domestic staycation boom has also propped up interest in the industry, and with foreign investors looming who’s to say what the next 18 months will hold. All of this, paired with the return of lending to expand, provides potential for the market to turn from recovery to growth.