The purchase of the De Vere Belfry hotel and golf course for £186m in February by Irish-owned Quinn Group marked yet another British property prize claimed for the trophy cabinet of Irish investors.
The famous Sutton Coldfield venue – best known for its links with golf’s Ryder Cup – has seen a few trophies raised aloft in its history, and now it has become a trophy itself.
Until recently, that cabinet also contained London marques the Savoy, Claridge’s, the Berkeley and the Connaught – all bought in April last year by a syndicate led by Irish investor Derek Quinlan for £750m in total.
But after just nine months – an indication of how quickly the hotels market is moving — Quinlan sold the Savoy in January for £250m to a joint venture between Saudi Prince Alwaleed bin Tala bin Abdulaziz Alsaud and Bank of Scotland for £250m. Canadian group Fairmont Hotels & Resorts – in which the Prince has a 5% stake — is to manage the hotel.
Rob Seabrook, vice-president of hotels at Jones Lang LaSalle Hotels, explains: “The Savoy deal offered Quinlan a quick profit and allowed Fairmont to come into the market.”
While such “big ticket” deals attract the headlines, they are the tip of an iceberg. The UK hotels sector is buoyant because investors want to buy and hotel groups want to sell.
Private and institutional investors
Property has become an important part of the portfolio of private and institutional investors alike, and the hotel sector is an attractive option at present.
After the slump in tourism that followed 9/11 and the start of the liberation of Iraq, the operating environment now looks healthier.
Figures from the Office of National Statistics show that there were 27.5m overseas visitors to the UK last year — an increase of 11% on 2003.
Hotel sector specialist TRI Hospitality Consulting reports that London hotels enjoyed a double-digit increase in profits in 2004. Total profit per available room rose by 13.9%. In the provinces, the percentage increase was 3.1%.
Revenue per available room (RevPAR) was up by 12.6% in London and up by 4% in the provinces.
TRI is predicting that RevPAR will increase by 9% in London this year, and by 5% in the provinces. Managing director Jonathan Langston says: “The terrific performance of 2004 sprang from a weak set of comparative results. Despite the strength of 2004, we expect that there is growth to come in 2005.”
Against this backdrop, it will be no surprise to learn that some major hotel groups, unrepresented in the UK market, are now looking at moving in.
Leading the charge is Hong Kong-based hotel chain Shangri-La Hotels & Resorts. It is to make its first foray into Europe, opening a 195-bedroom hotel in London at London Bridge.
Simon Hudspeth, head of consultancy at specialist agency Christie & Co, says: “There are many sources of capital keen to invest in hotel property. There is Irish capital as well as many institutional investment funds and specialist equity funds.
“This year a large volume of funds are seeking investment in the hotel market and a number of big hotel groups are keen to sell their hotels,” says Hudspeth.
Many hotel groups are disposing of their assets because they have been asset rich and capital poor for a number of years. Selling part of a portfolio frees up capital and allows a group to reward shareholders and expand elsewhere – a route favoured by the City.
Better understanding
Research from Savills suggests investors are attracted by a buoyant provincial market, a resilient budget sector, an increasing understanding of the hotel industry as a whole and the weakened performance of alternative investment markets. But although vendors and investors are keen to do a deal, they differ in their opinion of how that deal should be structured.
Hotel operators prefer management contracts to leases, as a lease can negatively affect a company’s balance sheet. With a contract, the onus for repairs, fixture and fitting is on the freeholder, leaving the operator to focus on hotel performance. This may explain why investors prefer the lease structure.
A year ago, hotel operators were embracing the franchising concept as a way to expand their business, but Seabrook at Jones Lang LaSalle Hotels says that is no longer in vogue. “It was a way in which groups looked to expand aggressively, but that is no longer the case,” he says.
But Seabrook warns that there could be differing expectations on the issue of price.
“One of the challenges is that in a rising market, the investors won’t want to pay for too much of the upside, so there is a pricing mismatch,” he says.
Nick Boyd, a partner at Edward Symmons Hospitality & Leisure, also notes the need for vendors to be realistic. “The market is strengthening, but deals are continuing to be price sensitive to the extent that hotels with high guide prices are proving hard to find buyers for,” he says.
Generally, the market is strong, and demand and supply are so well matched that such problems can be overcome.
Asher at Savills suggests the demand is such that the whole of the hotel sector is benefiting. “Most of it is going,” he says. “There are fewer four and five stars around, so they are most attractive. Yields are hardening, so the budget sector is buoyant.”
Demand provokes buoyancy
Hudspeth at Christie & Co believes this buoyancy will feed investment desire.
“Most of the hotels have come back to strong levels of occupancy. But in 2005, the real growth will be in rates rather than occupancy. We will see more growth in occupancy as well as rates growth. So on the trading front, optimism prevails,” he says.
Barthrop at Colliers Robert Barry is also upbeat. “I’ve never known a time when there was so much money around,” he says. “I think 2005 will be an active year. The bulk of the mid-market deals have been done, but there are still companies who want to divest themselves of the non-core rump of their portfolios.”
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Deals were completed by a mix of private investors and funds as well as hotel groups |
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Vendor |
Purchaser |
Size |
Deal |
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September |
Goldman Sachs’ Whitehall fund |
Hesperia |
212 bedrooms |
Holiday Inn, Victoria, London, for £35m |
|
Hilton Group |
Macdonald Hotels |
Two hotels with 88 and 62 beds respectively |
Hilton Aviemore and Aviemore Inn, Aviemore, for an estimated £2m-plus |
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Private |
Zeus Capital |
29 bedrooms |
Borrowdale Gate Country House, Keswick, Cumbria, for £2.25m |
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October |
Travelodge |
Prestbury Hotels |
135 hotels |
Sale-and-leaseback deal of 135 hotels for £400m |
|
LHM |
GuestInvest |
Five hotels |
Alias Hotel chain for £30.4m |
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De Vere Group |
The Cairn Hotel Group |
136 bedrooms |
De Vere Bellhouse, Beaconsfield, Buckinghamshire, for a reported £14.4m |
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Kasaido Corporation |
Kohler Co |
134 bedrooms |
Old course hotel, golf resort and spa, St Andrews, for £35m |
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Trefick |
Private consortium |
60 bedrooms |
Hanover International, Harpenden, Hertfordshire, for £5.2m |
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The Morcomb family |
Private |
58 bedrooms |
Cliff Head, Carlyon Bay, Cornwall, off an asking price of £3.65m |
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Trefick |
MGM Hotels |
50 bedrooms |
Hanover International, Dunstable, Bedfordshire, for £2.6m |
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November |
Whitbread |
Syndicate of private investors, with Kew Green Hotels leasing the hotels |
11 hotels |
Sale of the UK Courtyard by Marriott hotels for £79m |
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Grand Leisure Hotels Group |
Britannia Hotels |
1,100 bedrooms |
Group of four coastal hotels for £30m |
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Marylebone Warwick Balfour |
Private hotel investor group Samosir |
185 bedrooms |
Swissotel The Howard, London, for £75m |
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December |
BAA |
Airport Hotels Partnership |
500 bedrooms |
Radisson SAS, Stansted Airport, Essex, for £24m |
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BAA |
Blair Group |
364 bedrooms |
Jurys Inn, Heathrow Airport, for £16.3m |
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Morton Hotels |
Swallow Hotels |
25, 56 and 42 bedrooms respectively |
Royal Golf, Dornoch; Newton Hotel & Conference Centre, Nairn; and Golf View, Nairn, for an undisclosed sum |
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Source: Christie & Co |
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