Is this a good time to invest in your hotel’s assets?

It is unquestionably a volatile marketplace for the hospitality sector right now, with more converging issues impacting us at the same time than ever before. Having proven over the past three years that hospitality is an incredibly resilient business sector, what many are focusing on right now is how to ensure that this next period of trading – the second and third quarters – continues to build back, strengthen, and sustain their operating models. 

We believe that, whilst trading is good, a cautious approach to forecasting needs to be adopted. We fear that by the third and fourth quarters, hotels that are heavily indebted or cash restricted will struggle as trading becomes harder – therefore, potentially creating more opportunity for investment.

It is not an easy task to manage any business in the current climate and it is especially complex for hospitality businesses, because there is so much at play. And so, whilst demand for hotel bookings remains high, there are a multitude of commercial issues putting pressure on the bottom line. It is often difficult to know where (and how) to invest in your hotel asset to take advantage of or limit the risks associated with the current climate. Because of such shifting sands, it might be easy to conclude it is not a good moment – or even commercially possible – to turn these dynamics into opportunity.

However you look at it, there is a lot going on – decision-making for hotel owners and investors is loaded, because there are so many areas of challenge which all impact on each other, as well as the performance of the business. Challenges include the cost-of-living crisis, protecting the supply chain, the ongoing Ukrainian/Russian conflict, and the legacy of Brexit, which has massively impacted talent acquisition and retention. All of this is set against a backdrop of urgent demand for improved ESG (Environmental, Social, Governance) performance from all potential investors and against huge financial volatility and inflated costs of borrowing. It would be easy to conclude that it is not a wonderful time to invest in hotel assets.

Conversely, whilst we are advising clients to act with caution, to take time to scenario plan, and really undertake due diligence, we are also strongly advising that this is an optimum time to get involved in this exciting, innovative industry, quite simply because there is so much change, and with change, as we all know, comes potential. The opportunities exist for those with access to funds, those that can identify the right investment opportunity, and those that have a team to support acquisition and turnaround of any investment.

Here are a few things that are keeping us optimistic about investment in the hotel sector: 

1. History tells us that recessions and tougher financial times force weaker hotel investments onto the market, and so we predict that by Q3/4 there will be a rich opportunity for hotel investors to snap up or buy into underinvested hospitality assets.
2. Many hotel owners and hotel investors that have traded through the pandemic have managed to keep going because of government backed support. With this drying up and with interest rates remaining high, access to cheaper money, which has bolstered so many for so long, disappears, and with it, tough decisions are forced. This is driving speculation across the industry that struggling hotels will come up for sale.
3. Because there has been so little action in the acquisitions space since the pandemic years, there is considerable appetite from investment banks and investors that are starting to look at buying and investing.
4. Whilst asset pricing and valuations remain high – buoyed by performance last year outstripping all forecasting – it is possible that as things slow and the impact of the cost-of-living hits consumers’ pockets, then in Q3/4 we will see a less buoyant mood and demand, and the lag in post-Covid booking and higher than ever pricing will diminish. Reality will return, bringing with it less inflated financial performance, which is when we expect to see some significant opportunities for exciting investment open up.
5. Innovation in customer experience-led hotel stays present a hugely untapped niche, and for investors and hoteliers with vision, opportunity remains ripe. So, too, the impervious luxury market, which remains unfaltering and demand is high for lux, ultra lux, and increasingly personalised experiences. 

In summary, the second half of 2023 will become an exciting time for hotel investment opportunities with affordable acquisitions ripe for exploration. For existing hotel owners, focus on business improving investment to begin to position for exit.

Investors should continue to watch the market and read the travel and business media. Those actively looking for opportunities should seek the advice of a trusted advisor who can support identifying opportunities, run robust due diligence in identified investments, and setting a strategy that will realise the value of your investment.