Hotel transaction volumes have fallen by around 60% in H1 this year compared with the same period in 2022, according to new data from Knight Frank.
Investment volumes totalled around £860m in the first half of this year. Researchers said the “gulf between hotel trading performance and transactional activity has never been wider”.
Knight Frank pointed to “strong recovery” in hotel trading, citing data from HotStats showing London’s revenue per available room was 50% higher for first five months of the year versus the same time in 2022.
The research also pointed to a significant shift in buyer profiles during H1 this year. Specialist hotel-focused investors, high-net-worth individuals and family offices accounted for 70% of transactions.
Those deals, largely off-market, totalled around £600m and had an average transaction price of £273,000 per room, around 75% higher than the UK average.
Overseas investors made up 41% of transaction volumes during the same six-month period, while the sterling exchange rate remained relatively low. Much of that investment came from Europe, Middle East, and Asia.
Private equity investors that were mostly absent during the first half of 2023 are expected to re-emerge once the economic outlook becomes more certain and the cost of debt and financing shifts downwards.
Private equity investors have displayed an ongoing intent to invest, but with “increasingly discerning” asset selection, according to Knight Frank. The completed sale of the Waldorf Astoria Edinburgh in Q3 was used as an example.
Meanwhile, more capital from institutional investors exited the sector then was invested. Researchers said this was likely driven by the upward movement in gilts; ongoing uncertainty regarding interest rates; compliance to meet new fire and safety regulations; and ESG criteria becoming more rigorous.
Knight Frank noted that where institutional capital has been deployed, it has been largely restricted to new entrants seeking to diversify their portfolios and increase their exposure in the hotel sector.
Where fixed-income, budget hotels stock has transacted, transactions were “almost exclusively” driven by cash buyers, motivated by long-income opportunities and “often possessing some knowledge or attachment to the local market”.
Those buyers were a combination of private buyers, family offices and major hotel owners and operators.
Knight Frank predicted that the next six months will consist of “more robust” levels of investment activity, with several hotel deals known to be under offer. However, that level of activity will depend on monetary policy in the short-term.
Philippa Goldstein, senior analyst, hotels, and leisure at Knight Frank, said: “With the continued rise of interest rates, this has created upward pressure on yield requirements, but with greater resistance than compared to other property sectors.
“Hotel room rates, particularly in London, are keeping pace with inflation and with robust levels of trading, where cashflows have increased, this is helping to limit the negative effect on value.”
Henry Jackson, head of hotel agency and partner at Knight Frank, said: “Movement in pricing provides opportunity for buyer and seller price expectations to be realigned and further incentivises other types of investors to enter the market. HNWI and family offices are certainly becoming more active in the sector and with the increasing cost of debt finance they can outbid other types of buyers.
“Where assets have been operating exceptionally well, we are seeing competitively priced assets attract multiple strong offers, proof that capital is readily available where investors can see value.”
To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews
