Prime leased budget hotel investment yields have hardened to sub-5% for the first time since pre-downturn levels recorded in 2008.
According to Savills, the recent sale of two Premier Inn hotels in Holborn, WC2, and the City of London as well as the Ibis in Brighton have all achieved sub-5% net initial yields. The average London headline yield for leased hotels over the past 12 months is 5.6%, while the regional headline yield stands at 6.2%.
Savills said the main driver behind the yield compression is a combination of demand from funds with a weight of capital to invest in index-linked real estate let on long leases. Hotels are also now widely recognised alongside offices, retail and industrial sectors as an institutional asset class that offers an attractive risk premium, it added.
Michelle Webb, hotels director at Savills, said: “Increased activity within the hotel investment market across the UK means that we now have a consensus of pricing and greater evidence to make comparisons and identify trends. Over the past 12 months in particular we have seen a growth in regional hotel transactions, which has allowed us to track pricing and yields at a more micro-level. Regional hotels represented £1.4bn of the £3.2bn hotel sales so far recorded across the UK this year.
“But it is important to note that investors should look beyond the headline yields when assessing the pricing of a hotel asset. We are now beginning to see this happen with more institutions looking at the underlying trading of the hotel, assessing rent affordability, vacant possession value and identifying alternative tenants rather than just examining the covenant strength. This has been evidenced by LIM and Hermes funding new entrants to the UK market such as Motel One in Manchester and Qbic in the City of London.”
