The Grange Hotel, Tower Bridge – Knight Frank advised Aviva Investors on the acquisition of the ground rent

UK Hotel transactions have totalled £3.1 billion for the first six months of 2019, with investment levels only marginally down compared to the first six months of 2018. However, the sale of the Grange Hotel portfolio in March 2019 represented a third of the total transaction volume and thus masks the underlying trend that the current economic and political climate is cultivating a cautious approach to investment. The number of transactions are down 23% compared to the same period last year and the investment volume for Q2 is significantly down on historical performance, at £530 million for the quarter.

Source: Knight Frank Research

Nevertheless, London’s investment volume for the first six months totalled £1.9 billion, enjoying its strongest level of investment volume for the first six months of the year since 2015, buoyed by the sale of the Grange Hotel portfolio as well as an increase in the transaction volume of single asset hotels. Of particular significance is the average price per room transacted for single asset hotels, rising to approximately £430,000 per room, a rise of over 125% compared to H1-2018 and by over 40% compared to H1-2017.

Meanwhile, a dearth of portfolio transaction activity in regional UK for the first six months of 2019, equating to less than £700m has contributed to the disappointing level of investment activity, with portfolio transaction volume in regional UK down by 42% compared to H1 2018. Furthermore, the number of single asset hotels transacting declined by over 25%, involving some 30 assets, with the investment volume declining by 16% to approximately £230 million. Overall, total regional UK hotel investment of £1.2 billion for H1-2019 has declined by 39%, compared to the same period in 2018.  

This subdued level of investment activity in regional UK is clearly being affected by the challenging trading conditions facing the sector. A review of benchmark hotel data from HotStats shows a heightened contraction in GOPPAR of the regional UK market for the first five months of the year. Of particular consequence is the reduced demand for corporate and rack rate business, as well as increasing overheads. 

Nevertheless, the current decline in investment volume in regional UK, is not necessarily due to a lack of money or declining investor sentiment or confidence. 2019 represents a pivotal point in time for the alternative asset class, with institutional capital flows and interest in the hotel sector remaining strong, as the need for greater portfolio diversification intensifies and in pursuit of long-term, secure income streams. Due to this level of demand, with over £1 billion of fixed-lease and ground-lease investment deals to-date in 2019, the pricing of hotel real estate has increased by 46% for the first six months of 2019, with the average price per room transacting for all investment deals averaging £185,000 per room. 

A lack of available product, however, is almost certainly impacting upon regional UK transaction volume, as existing investors are choosing instead to hold their interest, taking advantage of a continued freeze on interest rates, enjoying the extended economic cycle and waiting until a time of greater transparency and certainty unfolds post the outcome of Brexit.

Henry Jackson – Head of Hotel Agency, Knight Frank, comments: “There is a lack of ‘value-add’ opportunities in the market at present and investors are being selective as to which assets meet their investment requirements. We continue to see new capital looking to invest, but a lack of opportunity is supporting vendors’ price aspirations.”

For further information please contact the Hotels Team at Knight Frank if you have any further questions.

Philippa Goldstein

Hotel Analyst

+44 (0) 7970 230801