In 2023, UK hotel transactions reached £2 billion, according to global property adviser Knight Frank.
Notably, the sector saw its pinnacle in Q4, securing £615 million in deals, marking a robust 31% of the entire year’s investment activity.
Knight Frank anticipates that this encouraging increase in investor activity at the end of 2023 will continue to build momentum through 2024, with investor demand and a narrowing of seller vs buyer expectations together with possible interest rate stabilisation or even cuts, all boding well.
Nevertheless, despite a promising recovery in the opening months of 2023, the rising cost of debt, elevated operational costs and a widening mismatch between buyer and seller price expectations all contributed to a decline in investment activity. As such, total annual investment volume declined for the third consecutive year, down by 37% on the previous year and some 57% lower than the ten-year average. Excluding the Covid-impacted year of 2020, investment levels were at their lowest since 2012.
The UK hotel market remains one of the most liquid hotel markets and continues to appeal to overseas investors seeking to increase their exposure to the sector. Foreign investment in 2023 totalled over £760 million, 39% of the total deal volume. Activity from continental European investors recorded an annual uplift of 40% in 2023 to over £350 million, whilst capital sourced from the Middle Eastern and Asia also increased.
The first quarter of the year accounted for 29% of total annual investment, equivalent of £570 million of transactions. The challenging macroeconomic environment led to a significant reduction in investment during Q2 and Q3, and the pool of buyers restricted to mostly experienced hotel owners, HNWI and family offices seeking long-term investment opportunities, and those private equity players already with a standing in the market. These investors accounted for over 70% of the total annual investment volume.
In Q4-2023, the sale of the two Hoxton hotels to Archer Hotel Capital for £215 million, was a significant contributor to the quarter’s investment. Demand for high-quality London hotel assets with strong brand recognition, combined with the Capital’s ongoing recovery in hotel trading performance, has seen London’s hotel values per room increase by 22% year-on-year.
Hotel development transactions, whilst fewer than historical volumes, have seen investors capitalise on the structural shift taking place in the office market, to repurpose the buildings or redevelop the sites for hotel use. Two examples include Dalata’s purchase of 28 St. Andrew’s Square in Edinburgh, to build a new 153-room Clayton Hotel, and Whitbread’s acquisition of New London House. With planning policies supporting the repurposing of offices, going forward investors are set to seek out opportunities in both London and key regional city centre destinations.
Whilst deals are taking longer to transact in the current environment, the pickup in activity evidenced by the increased dealflow in Q4 is expected to continue as the economic picture brightens. Looking ahead, Knight Frank anticipates more assets coming to market, fuelled by an increase in funder-led pressures, limited refinancing options, fund maturity, under-invested assets with low EPC ratings and more distressed asset sales. The potential for greater portfolio activity also exists as market conditions stabilise, with a possible early General Election and improved clarity over when interest rates might start to fall, providing the catalyst for heightened levels of investment.
Henry Jackson, Partner and Head of Hotel Agency at Knight Frank, commented: “We have seen an encouraging uptick in investor activity at the end of 2023, with demand for London hotel assets particularly positive. Geopolitical tensions have potential to limit overseas capital flows, and the upcoming UK and US elections are likely to weigh in on investment decisions.
“Yet, 2024 is expected to be a pivotal year, we anticipate that with the higher yields associated with operational real estate and the living sector driving an increasing allocation of capital, hotel investment will recover at a more buoyant pace as the year progresses. Hotel property continues to offer value and diversification of risk, and with hotel yields stabilising and trading expected to maintain its momentum despite low economic growth forecast, we envisage a greater volume of diversified capital to be deployed into the sector in 2024.”
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