International real estate advisor Savills has forecast that total transaction volumes in the UK hotels market could reach £8.5 billion by year end. This marks a 39% increase on 2014’s post recession peak of £6.1 billion and marginally exceeds the record total of £8.3 billion in 2006.
£5.7 billion so far
The firm reports that £5.7 billion worth of UK hotels have changed hands so far in 2015, with the H1 total 76.8% higher than the same period last year at £3.5 billion. High profile portfolio sales such as the LRG2 portfolio of Holiday Inn hotels (£225 million) have played a key role in this. Savills expects a further £1.6 billion worth of portfolio sales to complete in the final quarter or early part of 2016, including the £1 billion final tranche of the LRG portfolio of IHG branded hotels. This increase in activity is exerting downward pressure on yields with greatest compression seen in the franchised hotel sector where yields now range from 5.5%-8.5% compared to 6.5%-10% in 2014.
Regional transactions dominate
Savills also notes that regional transactions have dominated the UK hotels market so far this year, accounting for more than 78% of the total. US private equity houses have been behind 65% of hotel acquisitions in the regions (spending c.£2.1 billion), with key deals including Lone Star’s acquisition of the Jury’s Inn portfolio for £676 million. While US investors have remained the most acquisitive overseas buyers of regional hotels, this is down on the 90% share they held in 2014.
Marie Hickey, commercial research director at Savills, comments: “Availability constraints in London have attracted new overseas buyers to the regions, including Asia Pacific investors who have acquired more than £1 billion worth of regional hotel assets so far this year. Frasers Hospitality’s purchase of the Malmaison and Hotel du Vin portfolio at £363 million is a good example. While there were no country house hotel acquisitions by Asia Pacific investors in 2014, we have already seen five this year.”
Hotel investment by institutions
In terms of UK institutions, Savills reports that hotel investment is increasingly being seen as mainstream with acquisitions by UK institutions reaching an all time high of £1.2 billion last year. More than 93% of institutionally owned hotels are tenanted by a lessee, which indicates a clear preference for this type of asset. The biggest barrier to entry for institutional investors is therefore the fact that 80% of UK hotels are owner occupied or third party managed. In order to satisfy appetite for hotel investment, UK institutions are looking to new brands and concepts such as serviced apartments. Notable examples of this includes LaSalle Investment Management’s £9.6 million purchase of Staycity in Deptford.
Rob Stapleton, hotels investment director at Savills, adds: “The UK hotel investment market is on course for a record year as the appetite among overseas and domestic buyers in both London and the regions shows no sign of waning. With yields close to or at their pre-recession peak, further downward shifts will be constrained but we expect transactional activity to remain robust as the operational markets continue to show growth and portfolios acquired over the last four years are broken up.”
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