Whilst investment levels are subdued, fundamentals for the market remain strong, with several sizeable UK hotel transactions having completed early this year.
Year of contrasts
There was a subdued level of investment in 2022 which saw £3 billion of UK hotel transactions, 31% below the five-year average and 22% below the previous year’s investment levels.
This contrasted with the strong growth and recovery of trading performance which indicates the resilience of the UK hotel sector.
Cheaper transaction growth
Knight Frank analysed that the last 12 months saw lower levels of sizeable assets transacting but an increase in the volume of transactions of lower valued stock, with some 76% of single asset hotels transacting below £10 million, at an average lot size of £4.3 million.
Whilst there was a 55% increase in regional, independent UK hotels transacting, the average selling price of £7.1 million was lower than the previous year which had an average price of £9.5 million.
With a milder and shorter UK economic downturn now anticipated, combined with a positive trading outlook for the year ahead, there is encouraging momentum in the UK hotel sector.
A challenging operating environment exists, but as headwinds ease, Knight Frank predicts the market for hotel assets to become increasingly active.
Fundamentals for the UK hotel sector remain strong, with VisitBritain forecasting 35.1 million inbound visits to the UK in 2023, with visitor numbers forecast to be 18% higher than the previous 12 months. This will particularly benefit those hotels in markets with strong overseas demand, such as London and Edinburgh.
Knight Frank forecasts the share of transaction volumes for UK hotels within the alternative asset class to grow in 2023, driven by more stable market conditions and predicts a greater sense of urgency for investors to return to more normal levels of investment activity.
Second semester surge
The weight of capital seeking to target the hotel sector is expected to drive increasing transactional volumes, particularly during the second half of the year.
There remains no shortage of buyers seeking hotels which offer value add opportunities and with many hoteliers having benefited from robust trading off the back of a strong leisure market, more stock is likely to come available as exit strategies are deployed. Several sizeable hotel deals have already transacted at the start of 2023, with over £230 million of investment.
Henry Jackson, head of hotel agency at Knight Frank, said: “As confidence in the direction of the UK economy is further restored, there will come a greater urgency and decisiveness to execute a transaction.
“Currently, a heightened level of price sensitivity continues, yet the lack of quality branded stock available may serve to increase competition for assets, thereby protecting or even driving-up values in the short-term. Narrowing the gap between buyer and seller expectations, as well as securing affordable and sufficient debt to reach a positive outcome for both parties, remain key challenges.”
Philippa Goldstein, head of hotel research at Knight Frank, added: “We do not anticipate a significant volume of distressed assets coming to the market, particularly with ongoing government contracts in place and the rebase of business rates serving to help alleviate the hike in energy costs.
“Hotel transactional volumes are expected to remain constrained during the first six months of 2023, buyers not dependent on debt to execute a transaction are likely to be most active. Those deals which do complete are likely to be from buyers often driven by emotive reasons, or familiar with the market and consider there to be a long-term play.”
On the slate
Knight Frank itself has several hotel projects on its books. The firm is currently helping to develop Hotel Gotham Newcastle, which will result from the conversion of Newcastle’s former fire station. The five star site will boast 60 keys when it completes in Q1 2027.