Investors in the U.K. are united in their bullish sentiment on hotel real estate. According to new Cushman & Wakefield data, in the first quarter of 2024, U.K. hotel asset deal-making hit approximately £1.7 billion, the highest level since 2019, and a momentous year-over-year surge of 138% versus Q1 2023.
Not a surprise, but London accounted for 60% of major deals by volume and included the sale of Atlas House to Integrity International Group and the BT Tower to U.S.-based hotel owner and operator MCR Hotels. These two deals illustrated a continued interest in buyers acquiring non-hotel assets, in these cases offices, with the intent to convert them into hotels. These types of deals, Cushman & Wakefield noted, will continue to contribute a significant proportion of deal flow.
The Q1 2024 volume covered 93 properties across the U.K., representing around 7,600 rooms.
Two major portfolio deals, the Edwardian UK Radisson Hotel Portfolio and the LXi REIT Travelodge Portfolio, comprised 60% of transaction volume.
With regards to capital deployed, C&W data revealed that private buyers were the dominant force in deals completed at 69%, followed by public investors (23%) and institutional-backed capital, at 8%, creeping back into the sector.
“The last 18 months have seen the U.K. sustain elevated levels of hotel performance, which now appears to be stabilizing as the new standard,” said Ed Fitch, head of hospitality UK & Ireland at Cushman & Wakefield, noting that the bid/ask spread, or the delta between what a seller wants to sell for and what a buyer wants to buy for, continues to slowly narrow. “There is strong capital interest in the sector, yet deal flow remains constrained by a lack of product on the market while buyers are adopting a wait-and-see approach anticipating base rate cuts in the second half of 2024, against the backdrop of an impending U.K. election.
“From a yield perspective, we see that they remain stable against those established at the close of 2023. Toward the back end of the year, a slow and steady sharpening in line with the gradual reduction in base rates can be expected, although reversion to historic lows of the 2010s is unlikely.”
An opinion piece in The Financial Times published this week makes the argument that inflation persistence is a greater threat for the U.K. than the U.S. and that “rates cuts are a way off.”
Fitch contended that the “enduring” flight to quality assets and locations continues to dominate U.K. hotel investment, citing that 69% of deal flow was within the luxury and upper-upscale hotel segments. “This serves to heighten competition for opportunities in prime locations and maintain a consistently stringent yield environment for premium assets,” he said.
At the onset and within the wake of the pandemic, a prevailing attitude that a deluge of distressed assets would take place became almost ubiquitous among both the media and some within the banking community. However, across the U.S. and Europe, this did not and has not been true to form. As Cushman & Wakefield pointed out, limited distress is evident in the market buoyed by sustained hotel performance and lender support for the sector.
Despite a still rather muddied macroeconomic picture, positive sentiment within the hotel market continues, a positive sentiment bolstered by improved consumer confidence, alongside the projection that leisure demand for hotel nights in the U.K. will grow a further 6% this year, Cushman & Wakefield noted.
One positive outcome of the pandemic for business was the slowdown in new supply hitting the market, which helps to prop up industry fundamentals, namely occupancy and average daily rates. And while some new hotel projects are getting going and will open in the coming months and years, supply growth is expected to proceed at a decelerated rate relative to the past two years, according to Cushman & Wakefield, which stated that U.K.-wide room supply grew 0.2% since the beginning of the year with approximately 24,000 rooms still under construction, or 3.4% of inventory.
The slowdown, it said, in new-build construction can be attributed to increased costs of materials, labor and the higher cost of debt to finance these projects. As a result, conversion activity is expected to be a primary driver of hotel pipeline growth in the upcoming months, especially in key cities, it said.