Turbulent UK hotel investment ‘more settled’ in 2023

Following a turbulent 2022, this year has seen a “more settled” investment market for UK hotels, according to new research from Knight Frank.

This follows a subdued level of investment in 2022 which saw only £3bn of UK hotel transactions, 31% below the five-year average and 22% below the previous year’s investment levels. 

According to Knight Frank, the last 12 months saw lower levels of sizable assets transacting but an increase in the volume of transactions of lower valued stock, with some 76% of single asset hotels transacting below £10m, at an average lot size of £4.3m. 

Whilst there was a 55% increase in regional, independent UK hotels transacting, the average selling price of £7.1m was lower than the previous year which had an average price of £9.5m. 

With a milder and shorter economic downturn now anticipated, combined with a positive trading outlook for the year ahead, Knight Frank believes there is “encouraging momentum” in the UK hotel sector. 

While it warned a challenging operating environment still exists, it predicts the market for hotel assets will become increasingly active as headwinds ease.

In addition, fundamentals for the UK hotel sector remain strong, with VisitBritain forecasting 35.1 million inbound visits to the UK in 2023, with visitor numbers forecast to be 18% higher than the previous twelve months. 

Knight Frank also forecasts the share of transaction volumes for UK hotels within the alternative asset class will grow in 2023, driven by more stable market conditions. It also predicts a “greater sense of urgency” for investors to return to more normal levels of investment activity.

The weight of capital seeking to target the hotel sector is expected to drive increasing transactional volumes, particularly during the second half of the year, with “no shortage of buyers seeking hotels which offer value add opportunities”.  

Henry Jackson, head of Hotel Agency at Knight Frank, said: “As confidence in the direction of the UK economy is further restored, there will come a greater urgency and decisiveness to execute a transaction. 

“Currently, a heightened level of price sensitivity continues, yet the lack of quality branded stock available may serve to increase competition for assets, thereby protecting or even driving-up values in the short-term. Narrowing the gap between buyer and seller expectations, as well as securing affordable and sufficient debt to reach a positive outcome for both parties, remain key challenges.”

Philippa Goldstein, head of Hotel Research at Knight Frank, added: “We do not anticipate a significant volume of distressed assets coming to the market, particularly with ongoing government contracts in place and the rebase of business rates serving to help alleviate the hike in energy costs. 

“Hotel transactional volumes are expected to remain constrained during the first six months of 2023, buyers not dependent on debt to execute a transaction are likely to be most active. Those deals which do complete are likely to be from buyers often driven by emotive reasons, or familiar with the market and consider there to be a long-term play.”