The UK hotel market saw investment volumes reach an impressive £4 billion in 2021, representing the growing investor optimism over the long-term prospects for the sector, according to the latest UK Hotel Capital Markets: Investment Review 2022 by leading global property adviser Knight Frank – who are exhibiting at UKREiiF.
Despite the disruptive implications of coronavirus on the UK hospitality industry and notwithstanding the temporary setback of the Omicron variant, the underlying drivers of increased hotel demand, the continued improvement in profitability and visibility for future trading, have all contributed to improving investor and lender sentiment towards the sector.
Following the uncertainty throughout 2020, the government’s announcement of a roadmap out of lockdown allowed for the gradual rebound of hotel investment in 2021, as confidence improved. Hotel transaction volumes more than doubled in 2021, increasing by over £2 billion versus the previous year. 52% of the annual transaction volume completed during the final quarter of the year, illustrating the buoyed investor sentiment throughout the summer and autumn months due to the stronger trading performances.
Knight Frank research reveals that the makeup of transaction activity in 2021 was vastly altered compared to historical trends. In total, some 150 single asset hotel transactions took place in the UK with a guide price of over £2 million, equating to approximately £1.9 billion. This reflected a 58% increase in the number of single asset deals and 46% increase in the transaction volume, compared to 2019. This represents the highest level of single asset activity to take place since the record-breaking year for hotel investment in 2015.
The liquidity position and access to capital has been a determining factor for many owners and operators, with the extended crisis forcing many experienced owner operators to choose retirement and/or to exit from the sector. For others, decisive action resulted in various hotels changing ownership as owners took measures to reduce debt, support cashflow, or raise capital for investment in their wider portfolio. Strong domestic leisure demand acted as a further stimulus for hotels transacting, with an exceptional level of distinctive assets being sold.
Knight Frank remains cautiously optimistic for 2022, anticipating that transactional activity will be driven by a range of factors including, a greater level of asset rotation as investors prioritise stalled exit plans or bring new assets to market, to take advantage of the upturn in the investment cycle. Increased funding-led sales are also expected, but according to Knight Frank this does not necessarily mean distress. Instead, lenders will exert greater control over their loan books, encouraging owners to review their level of indebtedness and focus on those investment plans which will bring the greatest returns.
Henry Jackson, Head of Hotel Agency at Knight Frank, said: “With the setback of the Omicron variant having now passed, the strong flurry of transactional activity that occurred during the final quarter of 2021 is expected to continue in the months ahead. Investment is being lured by an extended period of uninterrupted trading in 2022, improving debt markets and attractive sector diversification, with best in class assets offering strong liquidity and competition in the market.
“Staycations in the UK are expected to continue boosting regional performance, and the return of international travellers will further enhance trading performance in London and city centre hotels throughout the UK. Whilst the sector is facing a sustained period of economic pressures, current market dynamics are likely to ensure a positive year ahead for the UK hotel transactional market, with volumes anticipated to rise to £5 billion in 2022.”
With considerable capital available for hotels located in strong staycation markets, some 46% of hotels which transacted in regional UK in 2021, were located in a rural/coastal/resort or private estate setting, equating to approximately £600 million of transactional volume. Knight Frank further reported over £625 million of independently operated hotels transacting in regional UK, a 385% increase compared to transaction volumes in 2019.
Philippa Goldstein, Senior Analyst, Head of Hotel Research at Knight Frank, said: “The appetite for hotel investment witnessed during the final quarter of 2021 is testament to the level of interest and capital available from well-funded investors eager to establish a presence in a sector that has proven its resilience. Looking ahead investors must remain increasingly alert to the various headwinds affecting the hotel sector. The pandemic forced owners and operators to properly understand the cost structure and manage a hotel’s cashflow effectively. With the current inflationary environment, this will further encourage operators to think creatively about increasing efficiency to help maintain or improve margins.”
Both London and regional UK continue to offer attractive, long-term returns for global and domestic investors, with hotel transaction volumes in the Capital reaching £2.1 billion in 2021, accounting for 54% share of total UK transactions. Some 74% of overseas investment was targeted towards London, which represented 51% of the total London hotel investment volume. With increased volumes of portfolio transactions anticipated to transact in 2022, Regional UK is likely to see its share of investment activity recover, along with greater investment by overseas investors for the year ahead.
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