Hotel transactions during Q1 this year have fallen by 33% year-on-year, according to new findings from Avison Young.
However, the agent’s latest UK Hotel Market Update Report showed that hotel transactions were up by 15% on the previous quarter.
Researchers at AY said transactional activity has slowed on a yearly basis following the interest rate increases in response to high inflation, and the ongoing rise in the cost of debt.
Despite the slowdown, researchers observed “strong demand” for regional properties. Notable deals included Pandox’s acquisition of the 232-bedroom Queens Hotel in Leeds for around £53m from Aprirose and Fattal Group’s purchase of the Grand Hotel Brighton.
London remained the core driving submarket in hotel investment, with one of the biggest deals being Firmdale Hotels’ acquisition of the Covent Garden Hotel for around £55m from CBRE Investment Management.
Portfolio deals are also underway, with Landsec closing on a £400m-plus deal to sell 21 long-held hotels to Ares Management. The 3,766-bedroom portfolio, operating under the Novotel and Ibis brands, is let to AccorInvest on a lease expiring in 2091, and the agreed price is expected to reflect an initial yield of around 6.5%.
Difficult economic conditions are expected to have an impact on transactional volumes for the remainder of 2023. However, the report said it is “almost inevitable” that time will run out for some operators, noting that opportunistic cash buyers are “circling” distressed or underperforming assets.
The report also noted that hotel performance went against the grain during 2022, with a backdrop of worsening economic conditions, ending the year with a strong recovery in revenues. This was buoyed by rate growth on the back of pent-up domestic demand, increased international travel and the return of meeting, incentive, conference and exhibition events.
A significant shift in pricing for long fixed-income investments was also highlighted, mirroring the moving-out of gilts.
Pippa Harrison, principal of hotel investment at Avison Young, said: “The drop in hotel transactions on the quarter comes as investors have become more selective in their capital allocation against a backdrop of high inflation and the increasing cost of debt. They are favouring high-quality, well-located assets, as well as value-add opportunities, and this is likely to be the case until we see an uptick in economic conditions.”
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