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Hotel investment: why now?

With hotels beginning to critically assess their portfolios and some ultimately ‘tired’ from recent events, we are seeing a ‘significant’ increase in hotels coming to market. As UK staycations become increasingly popular, investment in UK hotels is on the rise

According to Savills, investor demand for South West hotels “remains high” as transactions in the region hit in excess of £58m year-to-date. AGO Hotels, a hybrid-hotel lease operator, strengthens these statistics revealing that investment in hotels, in fact, has risen by 80% in comparison to 2020.“All of the UK’s top hotel markets are seen as more attractive than 12 months ago”, summarises real estate services firm Cushman and Wakefield, proposing that not only has appetite in the hotel sector grown significantly but it has surpassed pre-pandemic levels. Yet why are UK hotels so appealing to investors at present?

People are more cautious of travelling abroad,” says Ed Bellfield, regional director for hospitality in the south at Christie and Co. “There is a degree of stability to staying in the UK and more people are consequently fancying staycations.” As specified by Statista, “staycation” was the fastest growing holiday-related search term following the pandemic, with a recorded 500% increase in comparison to summer 2019. Savills underpins these figures suggesting regional assets accounted for a 78% share of transactions in the first half of the year, underlining the “ongoing confidence” in the staycation segment. Insurance firm Schofields suggests this is due to travel habits changing “significantly” with preference shifting to less crowded spaces. Staycations haven’t solely become preferable due to the pandemic however.

Statistics also show that holidays within the UK are not only a financially “safer” option for most, but many people will find staying within the UK to be a less stressful option. Schofields credits people vacating in the UK for the need to be more environmentally friendly, with 30% of customers saying they would swap a holiday abroad for a staycation to reduce the impact of travel on the environment. According to AGO, the hotel industry is invariably an attractive sector. “Hotels are difficult to replace. It’s not like you can go online and stay in a hotel virtually,” says Viv Watts, co-founder of AGO Hotels. “There’s still a lot of capital out there looking to be invested.”

Interestingly, Watts and AGO Hotels, which launched at the end of summer 2020, saw the opportunity to initiate a “slightly different” lease structure within hotel operations. He advocates the sector has gained interest from its ability to “bounce back” from the pandemic. Recent statistics from PwC certify that the forecast of revenue per available room (RevPAR) has improved, with London currently averaging £94.55 – approximately 74% of 2019 figures (£127.66) and the entirety of hotels across the UK positioning between 64% and 100% of 2019 levels. The firm reassures that “hotels ‘across’ the UK can look forward to significantly better trading over the next 12 months.”

So if demand for UK hotels is currently high and forecast to increase even further, why are hoteliers looking to sell? “Owners have grown tired, especially over the last couple of years, of the constant opening and closing,” urges Watts. He adds: “It’s a very difficult business to operate and they’re ultimately worn out.” Christie and Co noted that hoteliers started to “lose confidence” following the second lockdown, with many hoteliers deciding to close despite being allowed to stay open for corporate travel in limited numbers. Hoteliers have also begun to assess their portfolios more critically. “Operators and investors are segregating those assets that have performed particularly well, and looking at moving on those that need capex,” says Bellfield. Elite Hotels, an independent UK-based hotel group, recently sold Luton Hoo Hotel to the Arora Group. According to Elite, it enabled the business to carry out a “robust” refurbishment of its three remaining properties, promoting that some hoteliers may decide to sell some assets to strengthen their most profitable sites.

Across the hotel landscape, Christie and Co has overseen approximately 350 hotel transactions this year, a “significant” increase in 2019’s numbers, according to Bellfield, and the firm proposes independently owned hotels to be the main sellers. “The biggest issue for independent assets has been staffing problems,” he says. He suggests they are seeing the demand but “cannot service it”.

“We are only seeing sales on the owner operator side” and suggests this is due to the market’s “volatility,” agrees Watts. According to Christie and Co, the constant opening and closing of hotels throughout the pandemic discouraged owners to stay in the industry. Savills proposes a number of the sales were located in southern regions of the UK. The firm currently has £25m of hotel assets under offer in the South West, which are anticipated to complete in early 2022. As it is becoming clear that UK hotels, particularly in the South, are showing a “significant” indicator of confidence, what are the key properties that investors are looking for?

“Resorts and country house hotels,” states Bellfield. “By the very nature of the environment, those businesses are in a very strong financial position.” Savills suggests appetite has grown in this region due to it upholding an “enduring appeal” as a holiday destination. The firm also names Coastal and country hotels, especially in Devon and Cornwall, as “particularly popular” with both investors and consumers. Bellfield specifies a “50-bedroom hotel model, up to 100 plus” with “4-star rating,” and also suggests that the asset should encompass the “opportunity for development” with particular emphasis on a “holistic experience”.

According to Christie and Co, customers place ‘quality’, specifically with regards to food and beverage,’service’,’leisure’ and ‘treatment’, as top motivators when selecting a hotel. Recent statistics from reputation management firm TrustYou display that 28% of customers book a hotel solely on the positive reviews of the food, with 36% deeming comfort to be “extremely important”.

It can be said that the hotel landscape has endured an unpredictable period. The pandemic, as well as “supply shortages”, “staffing shortages” and “rising costs” have impeded the sector, yet whilst these reasons have hindered hotels, they have also aided them. Staycations have become the preferable destination for holidays and correspondingly have alerted the attention of investors. As there is a “surplus” amount of capital sitting in the UK, according to AGO, investors are beginning to delve into the sector again. But can we expect hotel investment to continue to rise?

“There is a lot of confidence in the underlying market’s ability to bounce back very quickly,” says Watts, and following Omicron’s impact over the Christmas period, hoteliers may need to. Profitroom’s latest report reveals UK hotel cancellations have dropped 40%, in comparison to 2020, yet it stresses these figures are set to increase “exponentially” as concerns over the new variant continue to rise. Yet “a lot of investors are seeing those as short term disruption to the markets,” says Bellfield. He adds: “In reality, the longer term confidence in terms of the whole sector is continuing to grow,” displaying that the industry won’t see the appetite “tail-off” from investors.

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