Economic uncertainty stalls UK hotel investment

£3 billion of UK hotel transactions took place in 2022, according to property advisor Knight Frank, with the total annual investment volume around 30% below the five-year average.

With momentum from Q4 2021 continuing into 2022, UK hotel investment saw a robust first half of the year, accounting for 68% (£2.1 billion) of total annual investment, the firm reported.

Market hindrances

However, the volatility that arose from the war in Ukraine, combined with global economic uncertainty and the domestic political turmoil, had a material negative impact on hotel transactional activity throughout 2022.

The surge in energy costs, increasing payroll and other operational costs, the hike in interest rates resulting in the rising cost of debt and the growing threat of an economic downturn have contributed to reduced levels of investment in the latter half of 2022, with many deals having failed to complete amidst increased economic uncertainty.

Positive future

This subdued investor sentiment contrasts with the strong growth and recovery of hotel trading performance in 2022, reinforcing the resilience of the UK hotel sector. The pandemic has been an accelerant of structural change, with over 19,000 rooms permanently closing over the past two years. 

Combined with slower growth in the hotel development pipeline, this has created a favourable backdrop for future investment. The sector is now in a strong position to navigate the current headwinds and macroeconomic uncertainty.

Subdued stock

Despite the anticipation of distressed sales in 2023, the ongoing availability of the UK government’s Home Office contracts continues to provide some hotel owners with attractive short-term income streams, materially affecting the likelihood of certain hotels coming on the market.

Knight Frank envisages subdued levels of stock becoming available over the coming year, increasing competition for assets, but anticipates a revival in the number of hotel portfolios being marketed next year. Different approaches to the marketing of these portfolios are likely, however, depending upon their size and makeup.

Anticipated upturn

Henry Jackson, partner and head of hotel agency at Knight Frank, said: “Whilst no hotel business is immune to the effects of an economic downturn, and whilst profit margins are likely to be squeezed in the short-term, operationally the sector has continued its recovery and an upturn in investment levels for 2023 is anticipated. We have seen an uptick in investor activity at the end of 2022 and purchasers who are proactively seeking out opportunities now are well placed to move quickly when new stock becomes available. Investors are showing renewed signs of confidence in the London hotel market, with overseas purchasers benefitting from currency plays.

“Once the economic picture is clearer and the availability of debt recalibrates, we expect transactional activity during 2023 to rebound at a more buoyant pace, exceeding 2022 levels. With hotel property offering value and resilience relative to other real estate asset classes, a wide range of investor types will seek to deploy capital into the sector.”

Premium pipeline

According to THP data, at least 468 premium projects are already in the UK hotel pipeline. One prominent development underway includes W Edinburgh, landing in the Scottish capital for Marriott International’s luxury brand in Q4 2023. The 12-storey building, housing 244 rooms, will feature a unique façade crafted from a winding  steel ‘ribbon’ and will be part of TH Real Estate’s Edinburgh St James mixed use development.

In the south west of the English capital, Hyatt Regency London Olympia will be integral to a redevelopment of Olympia, London’s historic convention centre built in 1873. The 196-site will complete in Q1 2024.

Plus on the north west Wales coast, five star property The Abersoch Hotel is taking shape in Gwynedd, ready for delivery in Q3 2024. With 42 luxury bedrooms and suites, a destination restaurant, bar, function spaces, gym and spa on the ground floor, the development will also include apartments set on the top two floors above the hotel.