UK hotel investment deals have fallen for the third consecutive year to £2bn in 2023, down by 37% on the previous year, according to the latest figures from Knight Frank.
The research showed last year’s investment levels were around 57% lower than the 10-year average. Excluding the Covid-impacted year of 2020, investment activity was at its lowest since 2012.
Researchers at Knight Frank attributed the decline to the rising cost of debt, elevated operational costs and a widening mismatch between buyer and seller price expectations.
Q4 was the most active quarter, with £615m of deals, representing 31% of the total annual investment activity. Knight Frank said this suggested that momentum was improving, with “investor demand and a narrowing of seller [versus] buyer expectations”, along with “possible interest rate stabilisation or even cuts”, all “boding well” for the sector this year.
In Q4, Norlake Hospitality’s sale of two Hoxton hotels to Archer Hotel Capital for £215m was a significant contributor to the quarter’s investment. Demand for high-quality London hotel assets with strong brand recognition, combined with the capital’s ongoing recovery in hotel trading performance, led to a 22% year-on-year increase in London’s hotel values per room.
Overseas investment represented 39% of deal volumes last year, totalling more than £760m. Activity from continental European investors recorded an annual uplift of 40% in 2023 to over £350m, while capital sourced from the Middle East and Asia also increased.
The first quarter of the year accounted for 29% of total annual investment, equivalent of £570m of transactions.
Knight Frank said the challenging macroeconomic environment led to a “significant reduction” in investment during Q2 and Q3, with the pool of buyers restricted to mostly experienced hotel owners, high-net-worth individuals and family offices seeking long-term investment opportunities, and private equity players already with a standing in the market. Those investors accounted for more than 70% of the total annual investment volume.
The agency predicted that more assets would come 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. It also highlighted the potential for greater portfolio activity as market conditions stabilise, with a possible early general election and improved clarity over interest rates catalysing more investment.
Henry Jackson, partner and head of hotel agency at Knight Frank, said: “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 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.”
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