Article

Will UK hotel investment see a post-Brexit bounce?

The UK is a long-term favourite with hotel investors - but Brexit caused many to put their decision-making on hold.

February 27, 2020

Investor confidence in the UK’s hotel sector is set to return this year as Brexit uncertainty settles, providing opportunities for both buyers and sellers alike.

In recent times, some investors have adopted a ‘wait and see’ approach, delaying decisions.

Now, with Brexit a reality, it could go some way to settling investor nerves – dependent on what happens with coronavirus, says Kerr Young, UK hotels & hospitality director at JLL.

“This year is likely to see existing owners carry out those divestments which they may have been holding off on,” he explains. “While there’s no shortage of frustrated capital seeking to be deployed, how realistic sellers’ price expectations are could dictate what kind of year 2020 is for overall investment volumes.”

Last year, overall investment in UK hotels fell 19 percent to £4.3 billion, reflecting a more cautious tone in the global market where investment volumes were down 6 percent on 2018. Nevertheless, the UK retained its crown as Europe’s top destination for hotel investors, buoyed in particular by increased activity in London.

"The perennial credentials that the UK has to offer investors – from transparency to its choice of product and its ability to offer stable income and relative liquidity – never went away,” says Young. “The appeal is broad.”

Such fundamentals are attractive to investors at a time of record undeployed capital looking for a home – and could see 2020 transactional volumes at 2019 levels, barring major disruption from coronavirus.

Varied pool of investors

Investment in the UK’s hotels remains dominated by domestic buyers, who last year accounted for around 67 percent of overall transactions.

However, the sector continues to attract international interest, particularly among Israeli, North American and Thai investors such as Bangkok-based DTOG, which late last year paid Marathon Asset Management £450 million for 17 IHG and Hilton-branded hotels.

“It’s an increasingly varied pool of international investors,” says Jessica Jahns, head of EMEA hotels & hospitality research at JLL. “Equally, investors’ modus operandi contrasts, with some preferring to simply own the real estate and others taking on both the operational and physical assets.”

Last year, UK real estate investment company Aprirose launched its own hotel operating platform Almarose, while opportunistic real estate investor, LRC continues to grow its portfolio after adding Amaris Hospitality as its hotel investment and management platform in 2018.

Private equity and institutional buyers remain the sector’s main sources of investment, accounting for 26 percent and 23 percent respectively last year. A lack of supply and headwinds in other real estate sectors saw investors diversify their search to deploy record levels of dry powder.

“Both private equity and institutional activity will continue in 2020,” says Jahns. “Given the challenges faced by retail, we’re likely to see more investors look to hotels as they seek to increase their exposure to operational real estate.”

One eye on policy

While 2020 may be the year that the UK hotel sector returns to form, investors and existing owners will be keeping a watchful eye on the UK government’s plans for taxation and infrastructure in its annual Budget in March.

“If the UK government loosens the purse strings and invests in major infrastructure projects, then investors – particularly long-term – will view that as a positive for regional UK cities,” Young says. “Any pro-business measures, such as tax cuts, could further re-energise the sector.”

Banks remain keen to lend to investors - for the right assets. “Lenders are selectively aggressive depending on the owner, asset and location,” says Young. “Traditional lenders, challenger banks and debt funds all have a preference for hotels in key city locations, while competition among lenders is less fierce in more secondary areas.”

In addition, ground rents will remain prominent as investors seek to take advantage of the historically low yields being paid for long leasehold assets.

“These structures will continue be utilised by a variety of investors to further enhance their returns,” Young says.

Overall, he believes “it’s a cautiously optimistic outlook but operators, investors and owners will be seeking a quick resolution to the going spread of coronavirus”.