Hotel dealmaking hits post-pandemic high

Investment in the hotel sector has reached its highest level since 2019, according to Cushman & Wakefield, signalling a comeback for dealmakers after the end of the pandemic. Hotel investors transacted around £1.7bn across 93 UK properties in Q1 this year, surging by 138% year-on-year. The figure represents around 7,600 rooms. Two significant portfolio deals, the Edwardian UK Radisson Hotel portfolio and the LXi REIT Travelodge portfolio, made up 60% of Q1 activity. London accounted for 60% of major deals by volume. This also included the sale of Atlas House to Integrity International Group and the iconic BT Tower to MCR Hotels. Cushman said the deals underscored sustained interest in development projects focusing on office-to-hotel conversions, which continue to contribute a significant proportion of deal flow. In terms of capital deployed, private buyers were the dominant force in completed deals at 69%, followed by public investors (23%) and institutional-backed capital (8%), which researchers said were “slowly reinvigorating” interest in the sector. Cushman said there were signs of sustained positive sentiment for the sector, bolstered by improved consumer confidence. It added that leisure demand for hotel nights in the UK is projected to grow by a further 6% this year. Hotel supply growth is expected to persist, although at a slower rate compared with the past two years. UK-wide room supply inched up by 0.2% since the beginning of the year, with some 24,000 rooms still under construction (3.4% of inventory). The slowdown in new-build construction was attributed to increased costs of materials, labour and financing. Conversion activity is expected to be a primary driver of hotel pipeline growth in the upcoming months, especially in key cities. Ed Fitch, head of hospitality UK & Ireland at Cushman & Wakefield, said: “The past 18 months have seen the UK sustain elevated levels of hotel performance, which now appears to be stabilising as the new standard. “The bid:ask spread continues to slowly narrow. There is strong capital interest in the sector, yet deal flow remains constrained by a lack of product on the market while buyers are adopting a wait-and-see approach anticipating base rate cuts in H2 2024, against the backdrop of an impending UK election.” He added: “From a yield perspective, we see that they remain stable against those established at the close of 2023. Toward the back end of the year, a slow and steady sharpening in line with the gradual reduction in base rates can be expected, although reversion to historic lows of the 2010s is unlikely. “The enduring ‘flight to quality’ continues to dominate the UK hotel investment, with 69% of deal flow amongst luxury and upper upscale hotel classes. This serves to heighten competition for opportunities in prime locations and maintain a consistently stringent yield environment for premium assets.” Image © Ismail Merad/Unsplash