_UK hotel investment records strong growth in 2018
Given the structural and technological changes that are affecting offices and retail in particular, this has led to positive momentum and record amounts of capital targeting the UK Alternative Property Sector, with hotels as an asset class increasing its market share by 3% to represent 37% of total investment volumes in the UK Specialist Property sector (which includes Student Property, Private Rented Sector, Healthcare an Automotive).
Regional UK
Regional UK accounted for 56% of total investment, with transaction volume rising by 27% to over £4.1 billion, which can be largely credited to the scale of portfolio activity, which accounted for 53% of activity, totalling approximately £2.1 billion.
Single asset investments in regional UK, fared less well, however, recording a 6% decline in investment of over £830 million, but with the number of deals and the number of rooms exchanging hands declining by 45% and the 36% respectively.
Our more detailed review of single asset transaction activity, revealed that UK domestic buyers were particularly active in pursuit of 3-star properties, accounting for 78% of the transaction volume, with the 3-star market increasing its share of single asset transactions to 35% and the average price per room sold of £97,000 per key, a rise of 48% compared to the previous year.
Meanwhile, overseas buyers were hot in pursuit of both four-star and five-star single asset hotels, with the strong demand and resilient trading performance driving the average price per room upwards.
The four-star market recorded a 34% rise in the average price per room sold to £146,000 and the five-star market witnessed a rise in market share and the average price per room increasing by 19% to approximately £310,000.
With some 35,000 rooms transacting in total throughout regional UK, involving some 370 hotels, the regional UK hotel market has seen no shortage of capital investing in quality stock, from a varied investor group.
Across all hotels transacting in regional UK (excluding developments and ground lease transactions), there has been a 6% increase in the transaction price, to approximately £122,000 per room sold.
London
Investment in the London hotel market during 2018 was buoyed by a strong year in portfolio sales, leading to a respectable rise in investment volume of 23% (excluding developments), with transactions totalling over £2.5 billion.
The continued strength of the global economy at the start of 2018, the liquidity of the UK property market and the competitive value of the pound are all factors that have helped attract safe haven capital flows to London.
On the rise in London during 2018, was the volume of investment deals, rising by 33% and totalling approximately £1.5 billion. Driving this growth was the number of fixed lease deals taking place, with investment volume rising by 166%, to over £530 million and the average price per room sold rising by 16% to £243,000 per room.
"Whilst investment levels are expected to be weaker than in 2018, due to a lack of single asset stock coming to market, we anticipate investment in the UK hotel market to remain strong during the second half of the year and into 2020."
Total investment in London climbed to £3.3 billion when including hotel developments. The acquisition of hotel sites and the forward funding of hotel projects equated to 21% of total investment in London, with the conversion of office or retail space deemed a viable option to overcome barriers to entry, particularly for full service upper-upscale and luxury hotel developments.
Meanwhile, London has continued to witness a decline in transaction volume of single asset transactions, accounting for only 15% of London’s total transaction market (compared to 23% the previous year).
Single asset deal sizes have been considerably smaller, resulting in the number of bedrooms declining by 33% and the total sales volume declining by 16% to around £475 million.
Above: Kimpton Charlotte Square Hotel - Edinburgh
Nevertheless, with strong demand from domestic and overseas buyers, sellers’ price expectations were generally maximised, with the average price per room sold of single asset hotels in London rising by 21% to £387,000.
Overall, including both single asset and portfolio transactions (but excluding developments), the average price per room sold in London declined by 13%, to £320,000 per room sold.
This is largely due to changes to the composition of hotels transacting, predominantly as a result of various portfolio acquisitions taking place in the mid to upscale category. In contrast, investment in London in 2017 was relatively subdued and a significant higher proportion of hotels transacted in the upper-upscale segments.
Outlook 2019
Continuing the strong end to 2018, with 29% of the annual investment activity taking place in the final quarter, the pace of investment for the first quarter 2019 has been strong, with approximately £2 billion of investment to date.
Three significant portfolio transactions have completed. Two have been sold to investment vehicles understood to be owned by the same investor. The first portfolio transaction involved Topland Group’s disposal of the Hallmark Hotel portfolio for £250 million.
Meanwhile, a portfolio of nine regional, leased Hilton hotels, known as Project Zinc, have been sold out of administration to Vivion Investments for £246 million, which is also known to be controlled by the Dayan Family.
Finally, Queensgate Investments completed on the £1 billion acquisition of the Grange Hotel portfolio. The four central-London hotels, totaling over 1,300 rooms are to be operated by Jurys Inn & Leonardo Hotels UK and Ireland, following the Israeli-based Fattal Hotel Group acquiring the long-term leases on all four properties.
For further detailed insight, the latest edition of Knight Frank’s UK Hotel Capital Markets Investment Review 2019 is out now. Download: