Investment into the UK hotel market totalled £3.1 billion in the first three quarters of the year, 12% above the 10 year average, according to new research from international real estate advisor Savills.
In the latest UK Hotel Investment report, Savills notes there is continued investor interest and resilience in the market despite some of the uncertainty surrounding the EU referendum. Deal count, on a rolling monthly basis, as of June was on par with that seen at the same point in 2015 at 113 and far outperformed the 10 year average of 60.
The research highlights that stock constraints in London and wider economic uncertainty has led to investment decisions being determined by income security rather than geography alone, providing a boost to transaction activity in the UK regions. In August, a traditionally quiet month, Savills confirms that 14 regional deals were completed compared to five in July including Imperial Hotel, Torquay for in excess of £10 million to the Brownswood Hotel Group and Kenwood Hall in Sheffield for £6.5 million.
For the first time since 2011 overseas investors no longer dominate acquisition activity with UK property companies taking the lion’s share, accounting for 34.6% (£1 billion) of total transactions. Just over half of this can be attributed to the c. £550 million acquisition of the Atlas portfolio by London & Regional. This trend is expected to continue as the weaker pound in the latter half of the year restricts UK property companies from buying overseas. Private individuals have also become more active over the course of 2016, with transaction volumes almost double that of year end 2015 levels at £340 million.
Overseas investors accounted for 26.3% (£804 million) of transactions in the first nine months of the year, placing them second in volume terms, according to Savills. Appetite from the group remained high but strong pricing constrained deal activity over the first half of 2016. Almost half of their spend can be attributed to the £350 million purchase of the former War Office, London, for hotel redevelopment by a joint venture between Hinduja Group and OHL Developments. Following the decision to leave the EU currency fluctuations have enticed overseas investors back due to the ‘value’ offer provided by the weaker pound with Q3 transaction volumes by this group totalling £268m.
Marie Hickey, commercial research director at Savills, comments: “Although we have experienced some softening in investor confidence in the UK hotels market in the wake of the EU referendum, this has not been to the detriment of the regional market. We are not seeing a retrenchment to London that we may have seen previously when faced with uncertainty. Rather the focus is increasingly on income security and those markets and assets that offer that, with our analysis suggesting regional towns such as Oxford, Bristol and Winchester offer the most robust operational fundamentals going forward.”
In terms of operating structures, leased deals account for the largest proportion of transactions in the first nine months of the year with Savills noting that the biggest buyers of leased assets remain institutional funds. To date, acquisition volumes of this group total £328 million. While appetite remains, there is significant stock constraint leading to some funds looking beyond traditional budget hotels that have historically dominated institutional activity. In May, Schroders Real Estate Fund acquired Staycity Hayes, a leased serviced apartment property, for £32.4 million.
Martin Rogers, head of UK hotel transactions at Savills, comments: “Its really been a case of two halves this year – pre and post the EU referendum vote – that has shaped the type of investor interested in the sector. Supply constraints and the strong pound affected the decisions of foreign investors over the first six months of the year meaning UK property companies are, to date, the most active in the market. As seen over the third quarter, in the coming fourth quarter we expect to see overseas investors make a comeback with them becoming increasingly more comfortable looking beyond London.