Main Photo: The Ritz London, one of the mega-deals completed in early 2020
Date: October 2020
Name: The UK Hotel Investment Report
Who Said What: Savills stated That UK hotel investment in the first nine months of 2020 reached £1.63 billion (€1.8 billion/$2.1 billion), down 54.4 percent compared with the same period in 2019 and largely represented deals completed or agreed pre-lockdown, in the first quarter, according to Savills.
Despite a significant drop compared to volumes witnessed over the previous three years, hotel investment volumes remain above that experienced during the height of the global financial crisis in 2009.
Hotel investment volumes have suffered due to Covid-19, but interest levels remain relatively robust
A major barrier to entry for some investors has been the difficulty in obtaining debt for hotel investment in light of the recent operational headwinds, effectively dragging transaction volumes since March. Nonetheless, interest levels from cash-rich investors have remained robust. International investors accounted for a 70.1% share of year-to-date transaction volumes, formed primarily by Israeli-backed Vivion Capital acquiring the Sanderson and St Martin’s Lane hotels in January followed by Qatari-based investors acquiring The Ritz in March, with a combined volume nearing £1 billion.
In parallel with previous downturns, some investors have shifted focus towards quality trophy assets in London, despite the acknowledged slower performance recovery and difficulty travelling to the city for some international buyers. Key assets in ultra-prime locations are unlikely to experience such pronounced fluctuations in regards to capital value compared to the wider market. London has therefore accounted for an 87.3% share of total UK investment volumes so far in 2020.
Elsewhere in the market, investors are keeping a keen eye on well-located value-add opportunities for properties with development potential to increase their longer-term income profile. As a result, we’ve seen some assets achieve higher than their pre-Covid guide price. For example, Savills sold SoHostel in London’s Soho in excess of £30 million in August, more than 5% above the pre-Covid guide price after a fiercely contested bidding process. Located adjacent to Tottenham Court Road’s new Crossrail entrance, the property provides the new owners with development and trading upside potential to drive further value.
Strong recovery is driving investment across key UK staycation markets…while investment volumes have been dominated by London, total deal count outside of London has climbed dramatically since the easing of lockdown, in line with the strong recovery displayed across key UK staycation markets. Robust operational performance is expected for the foreseeable future in light of the ongoing restrictions limiting international travel, with reports of high levels of domestic bookings next summer already in some locations. As a result, interest levels from private investors for coastal and country hotels have surged, with Savills receiving multiple offers above guide price on well-situated regional assets.
This has also encouraged future funding support for hotel development opportunities across key UK regional destinations. For example, Dalata and Topland recently entered into an agreement to develop a new 221-room Maldron Hotel in staycation hotspot Brighton, emphasising longer-term investor confidence in UK’s booming staycation market.
Yield reversal experienced in 2020… In terms of pricing, while very little transactional evidence makes yield movements difficult to ascertain, current sentiment suggests that prime hotel yields have experienced an outward shift across most operating structures. Yields on franchise and turnover terms are expected to have seen a 50 basis points (bps) and 25bps softening respectively, off the back of the record lows recorded in 2019. Prime yields on a leased basis remain unchanged compared to pre-Covid levels at 3.75% in accordance with ongoing but selective interest for leased assets in core locations with best-in-class covenants and a sensible rental tone.
Further hotel yield softening can be expected across some non-core markets going forward, driven by ongoing subdued trading performance. However, this could generate further investor interest, with well-positioned buyers particularly acquisitive given the attractive pricing on offer.
A number of investors have announced closing on new funds looking to deploy capital into the challenged sector as an opportunistic play
As a result, a number of investors have announced closing on new funds looking to deploy capital into the challenged sector as an opportunistic play. UK-based Schroders, for example, recently announced a new €425 million pan-European hotel fund, with the objective of capitalising on attractive hotel and leisure opportunities across key Western European markets.
How does the hotel sector fare against other investment options? The spread between hotel equivalent yields and government bonds is at an all-time high of 408bps as of Q2 2020, far outstripping the 15-year average of 248bps according to MSCI (see chart below). This spread has widened in recent months in light of the subdued interest rates coupled with a slight outward movement in hotel equivalent yields. While at a glance, this might look particularly attractive for hotel investment, the risk element should be considered. Akin with previous recessions, many investors are veering on the side of caution, seeking the long-term security and ease of the buy/sell factors that support government bonds. That being said, well-positioned investors with strong cash reserves may look to commercial real estate as a move to improve their long-term income profile, and as a hedge against a potentially inflationary environment in the UK post-Brexit.
Compared to other commercial real estate sectors, UK hotel equivalent yields have remained the lowest on average since Q1 2012 within the MSCI database, in line with continued investor appetite for long-term secure income. Despite marginal shrinking in Q2 2020, the spread between UK hotel equivalent yields and the all property average remains sizeable, at 106bps. However, further hotel yield softening could provide comparatively attractive pricing within some markets.
While the immediate operational headwinds in the hotel market will be a cause for concern for some investors, the longer-term outlook for the sector continues to bode well for prime assets and development opportunities whilst we expect distressed sales to drive investment volumes as we move into 2021. In addition, further currency play post-Brexit continues to entice international buyers seeking relatively well-priced hotel assets.
In light of the current consumer environment, the hotel market is in temporary oversupply across some locations, however, there are a number of options for hotel owners in terms of dormant or underused properties.
Short-term redefinition of space has provided interim cash-flow for some operators, whether that be in the form of alternative workspace for individuals/ companies, pop-up restaurant space or healthcare response centres.
More permanent renovations could provide hotel owners with a longer-term solution. The typical configuration of hotel properties bodes well for change of use to other sectors such as healthcare, multi-family or student housing.
This also works in both directions, with areas of strong hotel demand being a more attractive long-term option for owners of vacant/under-utilised retail or office space. This has brought about hotel development opportunities across the UK. For example, two historic department store properties in Edinburgh have been earmarked for mixed-use developments each including hotel assets. This trend is likely to continue given the headwinds facing sectors like retail, which could leave vast pockets of vacancy across well-situated locations.
THPT Comment: Good report by Savills and confirmed what we are hearing… funds being formed to take advantage of the Covid discount, when it his the UK and London…not quite yet…more of that happening in the weaker economies of Southern Europe – Spain, Italy, Portugal…hotel space being reimagined to offer more we-work type spaces, retail conversions into hospitality in key areas. The headline good news is somewhat prevaricated by a couple of big deals before the full implications of Covid were really understood.
First Seen: Savills Research website
The Hotel Property Team (THPT) is a small group of highly experienced business professionals. Between us, we provide a range of skills and experience which is directly relevant to those involved in the hotel property market.