Hotel investment subdued by economic uncertainty in FY22

Some £3bn of hotel transactions took place in 2022, with the total annual investment volume around 30% below the five-year average, according to Knight Frank,  

As momentum from Q4 2021 continued into 2022, UK hotel investment saw a “robust” first half of the year, accounting for 68% (£2.1bn) of total annual investment. 

However, volatility that arose from the war in Ukraine, combined with global economic uncertainty and domestic political turmoil, had a material negative impact on hotel transactional activity throughout the year, Knight Frank said.

Rising energy, payroll and other operational costs, the hike in interest rates resulting in the rising cost of debt and the growing threat of an economic downturn led to reduced levels of investment in the latter half of 2022, with many deals failing to complete amid increased economic uncertainty.

Knight Frank said subdued investor sentiment contrasts with the strong growth and recovery of hotel trading performance in 2022, “reinforcing the resilience of the UK hotel sector”. 

It added that structural change brought on by the pandemic, which saw over 19,000 rooms permanently close over the past two years, combined with slower growth in the hotel development pipeline has created a “favourable backdrop” for future investment.  

Despite the anticipation of distressed sales in 2023, Knight Frank also noted that the ongoing availability of Home Office contracts continues to provide some hotel owners with “attractive” short-term income streams, materially affecting the likelihood of certain hotels coming on the market. 

It envisages subdued levels of stock becoming available over the coming year, increasing competition for assets, but anticipates a revival in the number of hotel portfolios being marketed next year.  

Henry Jackson, partner and head of Hotel Agency at Knight Frank, said: “Whilst no hotel business is immune to the effects of an economic downturn, and whilst profit margins are likely to be squeezed in the short-term, operationally the sector has continued its recovery and an upturn in investment levels for 2023 is anticipated. 

“We have seen an uptick in investor activity at the end of 2022 and purchasers who are proactively seeking out opportunities now are well placed to move quickly when new stock becomes available. Investors are showing renewed signs of confidence in the London hotel market, with overseas purchasers benefitting from currency plays.”

He added: “Once the economic picture is clearer and the availability of debt recalibrates, we expect transactional activity during 2023 to rebound at a more buoyant pace, exceeding 2022 levels. With hotel property offering value and resilience relative to other real estate asset classes, a wide range of investor types will seek to deploy capital into the sector.”