Pippa Harrison takes a look at the UK hotel investment market and its primary stakeholders.
How is the UK Hotel investment outlook shaping up for 2025? Are we likely to see similar volumes this year or could lack of stock mean lower volumes compared to 2024?
In 2024, the UK investment market had a strong recovery to £6.3 billion. We saw portfolio sales dominate over individual property transactions, accounting for 57% of the investment volumes such as Blackstone’s £700m purchase of the 33 Village Hotels from KSL partners. Similarly, fixed-income investment hotel deals accounted for 26% of the total UK hotel investment market, owing to the attraction of strong operational resilience and its strength against inflation and pricing still being underpinned by VP values in most cases.
In terms of looking forward to 2025, we expect the normal market equilibrium to return with strong demand from UK investors attracted to the slow recovery of the fixed income market, mainly due to high gilt rates and higher than projected inflation. We are also seeing European funds return to the UK as well as further overseas investment. Whilst we will likely see portfolio sales continue; we expect a greater number of single asset transactions throughout the year. The first quarter is already creating a strong start to 2025 with an increase in individual sales, especially in the long income hotel market.
In terms of looking forward to 2025, we expect the normal market equilibrium to return with strong demand from UK investors attracted to the slow recovery of the fixed income market, mainly due to high gilt rates and higher than projected inflation. We are also seeing European funds return to the UK as well as further overseas investment. Whilst we will likely see portfolio sales continue; we expect a greater number of single asset transactions throughout the year. The first quarter is already creating a strong start to 2025 with an increase in individual sales, especially in the long income hotel market.
Hospitality Investment levels are at their highest since 2018, with further capital being allocated, where's the opportunity for investors looking to enter this space? What's the opportunity for developers?
The hotel market itself is an opportunity for capital deployment. Investment sentiment to the asset class has improved demonstrably over the last few years as investors have witnessed the operational resilience of the sector, viewing it as a means of hedging inflation as well as a value-add allocation.
There is still a lot of ‘dry powder’ out in the wider investment market and plenty of opportunities for investors in hotel submarkets that have fared particularly well over the last few years. The luxury market has gone from strength to strength driven by the seemingly inelastic demand of their clientele who are searching for high levels of service in sought after locations with the drive of work life balance. The serviced apartment/aparthotel submarket has also proven that it is a robust operational model with resilient profits during Covid. This sub-market, along with the budget hotel market will also be hit less by the new increase in April of the National Insurance Tax and Minimum Wages, as staff to guest ratios are much lower than standard hotels.
The positioning of the aparthotel/serviced apartments model has been well received by guests and investors alike; guests benefit from some hotel-style level of amenities while still having a ‘home-like’ feel and investors benefit from highly efficient operational models ensuring strong profit conversion.
As with much of Real Estate, there may be preferred segments and geographies, but it will be the characteristics of the asset that will offer value-add opportunities. Global Investors continued in 2024 to enter this space by setting up new JV structures with local asset managers and specialist hospitality operators, joining forces to maximise these opportunities, such as with PGIM with Sonae Sierra and IHSP. This trend continues into 2025 with Invel Real Estate (private equity) setting up a new JV with the Hybrid hospitality operator YellowSquare. Closing is due by the end of this first quarter, according to STAY WYSE.
The development market is still below pre-pandemic levels due to various factors, but especially with the continuation of high construction and financing costs. This has created interest in the repurposing of older office and retail buildings for hospitality and residential led asset classes, with some planning authorities looking more favourably at the prospect as they aim to revitalise their high streets and make use of vacant properties. Examples of this includes Dominus and Premier Inn both acquiring several City of London office buildings, while Criterion Capital has acquired the Noble House (former home of the Department for Environment Food and Rural Affairs) in Pimlico, as well as the former Debenhams Department Store in Edinburgh.
There is still a lot of ‘dry powder’ out in the wider investment market and plenty of opportunities for investors in hotel submarkets that have fared particularly well over the last few years. The luxury market has gone from strength to strength driven by the seemingly inelastic demand of their clientele who are searching for high levels of service in sought after locations with the drive of work life balance. The serviced apartment/aparthotel submarket has also proven that it is a robust operational model with resilient profits during Covid. This sub-market, along with the budget hotel market will also be hit less by the new increase in April of the National Insurance Tax and Minimum Wages, as staff to guest ratios are much lower than standard hotels.
The positioning of the aparthotel/serviced apartments model has been well received by guests and investors alike; guests benefit from some hotel-style level of amenities while still having a ‘home-like’ feel and investors benefit from highly efficient operational models ensuring strong profit conversion.
As with much of Real Estate, there may be preferred segments and geographies, but it will be the characteristics of the asset that will offer value-add opportunities. Global Investors continued in 2024 to enter this space by setting up new JV structures with local asset managers and specialist hospitality operators, joining forces to maximise these opportunities, such as with PGIM with Sonae Sierra and IHSP. This trend continues into 2025 with Invel Real Estate (private equity) setting up a new JV with the Hybrid hospitality operator YellowSquare. Closing is due by the end of this first quarter, according to STAY WYSE.
The development market is still below pre-pandemic levels due to various factors, but especially with the continuation of high construction and financing costs. This has created interest in the repurposing of older office and retail buildings for hospitality and residential led asset classes, with some planning authorities looking more favourably at the prospect as they aim to revitalise their high streets and make use of vacant properties. Examples of this includes Dominus and Premier Inn both acquiring several City of London office buildings, while Criterion Capital has acquired the Noble House (former home of the Department for Environment Food and Rural Affairs) in Pimlico, as well as the former Debenhams Department Store in Edinburgh.
Investment levels declined through 2023, why exactly are we seeing a turnaround in volumes now?
In 2023, there was a disconnect between vendor and buyer expectations. A result of strong operational performance juxtaposed with rising borrowing costs, posing a major challenge to transactional activity. However, with operational performance stabilising throughout 2024 and the cost of debt beginning to subside, this gap is beginning to narrow and is allowing for a more practical view on pricing. We could also see some lenders in 2025 needing to reduce the overall levels of debt with their customers. As lenders work towards a more sensible level of Loan to Value (LTV) with their borrowers, we could see an increase in individual hotel sales as they agree to reduce their LTV, especially those with portfolios.
Who are the primary investors? Why would investors from outside the UK be interested in investing in the UK right now?
There were a number of portfolio transactions in 2024, with these investors dominating the transaction market. KKR’s £900m transaction on 33 Marriott Hotels has brought them to being the top hotel investor of 2024. Similarly, LondonMetric’s Travelodge acquisition means they are also a top player and the top UK investor, as well as Starwood, Baupost Group and Blackstone.
The US stood out as the top UK hotel investor in 2024 with four of the five largest deals in 2024 being American firms. This was followed closely by European investors as well as those from Hong Kong. In terms of capital deployed, private investors dominated the market and is expected to continue into 2025. So far this year we have seen an increase in long income hotel investments from European investors, especially France and Ireland. As interest rates decrease it is likely that we will see a further diversification of capital into this sector.
The US stood out as the top UK hotel investor in 2024 with four of the five largest deals in 2024 being American firms. This was followed closely by European investors as well as those from Hong Kong. In terms of capital deployed, private investors dominated the market and is expected to continue into 2025. So far this year we have seen an increase in long income hotel investments from European investors, especially France and Ireland. As interest rates decrease it is likely that we will see a further diversification of capital into this sector.
Manchester is the location outside of London with the largest development pipeline, do you see Manchester remaining at the front of development or are their other regional cities that might take the top spot? Where are your clients looking to invest?
Manchester has been a real success story with over 20 hotels opening in the last five years, all while maintaining strong and resilient performance metrics. Its hotel market has been boosted as regeneration schemes further embellish the burgeoning corporate and events demand landscape. However, due to the high volume of new keys that have and will enter the Manchester hotel market we would expect that there will be less demand from developers who are now seeking opportunities in other cities.
Edinburgh has been on the top of most investor’s ‘regional’ lists due to its well-publicised boom in average daily rates (2024 was up c.59% from 2019 levels) buoyed by strong domestic demand and the return of international travel with the reopening of key air routes to North America and China. Development in Edinburgh is however very restrictive and constrained, as such available stock is well sought after by a range of investors with varying risk profiles. A proposed future ‘tourist tax’ may curtail some leisure demand, but Edinburgh’s international profile, full roster of events, and its strong financial and tech sectors will ensure it remains a key target for developers and investors.
We are also seeing increased interest in Oxford and Cambridge, with their varying mix of demand generators – world class universities, excellent tourism attractions and the large number of business and science parks with high value corporates that surround the two cities.
With the Government introducing further investment into the Oxford-Cambridge Growth Corridor, it is likely that hotel developers will see these two cities as real opportunities.
Edinburgh has been on the top of most investor’s ‘regional’ lists due to its well-publicised boom in average daily rates (2024 was up c.59% from 2019 levels) buoyed by strong domestic demand and the return of international travel with the reopening of key air routes to North America and China. Development in Edinburgh is however very restrictive and constrained, as such available stock is well sought after by a range of investors with varying risk profiles. A proposed future ‘tourist tax’ may curtail some leisure demand, but Edinburgh’s international profile, full roster of events, and its strong financial and tech sectors will ensure it remains a key target for developers and investors.
We are also seeing increased interest in Oxford and Cambridge, with their varying mix of demand generators – world class universities, excellent tourism attractions and the large number of business and science parks with high value corporates that surround the two cities.
With the Government introducing further investment into the Oxford-Cambridge Growth Corridor, it is likely that hotel developers will see these two cities as real opportunities.
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