Hotel transactions in the UK reached £2bn last year, according to Knight Frank. The strongest quarter of the year for investment into the sector was Q4, with £615m of deals, representing 31% of the total annual investment activity.
Knight Frank anticipates that this encouraging increase in investor activity at the end of 2023 will continue to build momentum through 2024, with investor demand and a narrowing of seller vs buyer expectations together with possible interest rate stabilisation or even cuts, all boding well.
Nevertheless, despite a promising recovery in the opening months of 2023, the rising cost of debt, elevated operational costs and a widening mismatch between buyer and seller price expectations all contributed to a decline in investment activity. As such, total annual investment volume declined for the third consecutive year, down by 37% on the previous year and some 57% lower than the ten-year average. Excluding the Covid-impacted year of 2020, investment levels were at their lowest since 2012.
The UK hotel market remains one of the most liquid hotel markets and continues to appeal to overseas investors seeking to increase their exposure to the sector. Foreign investment in 2023 totalled over £760m, 39% of the total deal volume. Activity from continental European investors recorded an annual uplift of 40% in 2023 to over £350m, whilst capital sourced from the Middle Eastern and Asia also increased.
The first quarter of the year accounted for 29% of total annual investment, equivalent of £570m of transactions. However, Knight Frank said that the challenging macroeconomic environment led to a significant reduction in investment during Q2 and Q3, and the pool of buyers was restricted to mostly experienced hotel owners, HNWI and family offices seeking long-term investment opportunities, and those private equity players already with a standing in the market. These investors accounted for over 70% of the total annual investment volume.
Office to hotel conversions
Hotel development transactions, whilst fewer than historical volumes, have seen investors capitalise on the structural shift taking place in the office market, to repurpose the buildings or redevelop the sites for hotel use. Two examples include Dalata’s purchase of 28 St. Andrew’s Square in Edinburgh, to build a new 153-room Clayton Hotel, and Whitbread’s acquisition of New London House. With planning policies supporting the repurposing of offices, going forward investors are set to seek out opportunities in both London and key regional city centre destinations.
Looking ahead, Knight Frank anticipates more assets coming to market, fuelled by an increase in funder-led pressures, limited refinancing options, fund maturity, under-invested assets with low EPC ratings and more distressed asset sales. The potential for greater portfolio activity also exists as market conditions stabilise, with a possible early General Election and improved clarity over when interest rates might start to fall, providing the catalyst for heightened levels of investment.
Henry Jackson, partner and head of hotel agency at Knight Frank, commented: “We have seen an encouraging uptick in investor activity at the end of 2023, with demand for London hotel assets particularly positive. Geopolitical tensions have potential to limit overseas capital flows, and the upcoming UK and US elections are likely to weigh in on investment decisions.
“Yet, 2024 is expected to be a pivotal year, we anticipate that with the higher yields associated with operational real estate and the living sector driving an increasing allocation of capital, hotel investment will recover at a more buoyant pace as the year progresses. Hotel property continues to offer value and diversification of risk, and with hotel yields stabilising and trading expected to maintain its momentum despite low economic growth forecast, we envisage a greater volume of diversified capital to be deployed into the sector in 2024.”
Overnight stays in hotels projected to surpass 2019 levels in 2024
Cushman & Wakefield's estimate for the amount of real estate transacted by hotel investors in the UK last year (£2.4bn) was 20% higher than Knight Frank's estimate of £2.0bn. C&W also said that just over a fifth (£0.5bn) of that total comprised office sites which are planned to be converted into new hotel accommodation.
Across the year, London in particular witnessed a boom in development projects with office-to-hotel conversions particularly popular. The prime location of many office buildings, coupled with the desire to maximise underutilised real estate and the growing demand for hotel accommodation, have all played a role in fuelling this trend.
Several local authorities are actively endorsing this transformation, while the City of London Corporation stands out particularly as an advocator for change of use in a bid to safeguard property values, diversify use-classes and, in the long-term, enhance the City as both a business and leisure destination.
Ed Fitch, head of hospitality UK & Ireland at Cushman & Wakefield, said: “Looking ahead, overnight stays in hotels are projected to surpass 2019 levels in 2024, with domestic overnights up by double figures. Cross-continental demand recovery, especially from the Asian and the American markets, should provide further support to this upward trajectory.”
