Strong investor demand in UK drives down yield
Strong investor demand in UK drives down yield
05 OCTOBER 2018 7:22 AM

On the hotel sellers’ side, the United Kingdom must seem like a paradise with a wall of capital ready and waiting, but with demand increasing, buyers need to find where value can be added and someone willing to sell.

LONDON—Investors who are interested in deploying capital in the United Kingdom hotel industry must realize that yields are down to around 3%, sources said, and successful entrants and hoteliers will be those who think creatively and create relevance.

The mood has swung from opportunistic buys to ones orchestrated by institutional capital, according to sources.

Speaking at the recent Hotel in Europe Investment Conference, panelists at a session titled “Opportunities in the U.K.” said growth is slowing in the U.K. as more supply comes in.

“Glasgow, Aberdeen and Birmingham are the best bets right now, while Manchester, Bristol, Southampton and Edinburgh are sluggish,” said Samantha Ward, United Kingdom hotels leader at PwC, referring to increases in performance metrics and where buyers and sellers are sniffing around.

Demand remains strong, though, said Peter Anscomb, senior corporate director of Edwardian Hotels London, a family business that is the London master franchisee for Radisson Hotel Group.

“Benefits go up and down with the exchange rate, but overall the demand is there,” Anscomb said. Demand for inbound travel to the U.K. “varies as to what country it comes from, so we have to make sure we have live distribution strategies.

“We had a strong first period this year, and the next few quarters have the strongest position on the books we’ve had for years across the group’s 12 properties. Ten are seeing good growth on (revenue per available room), and the two that are not should by the end of the year.”

Neeraj Handa, director of operations at Cairn Group, said the U.K. will see an impact from new builds, mostly in the budget sector.

“There are two solutions on a case-by-case basis,” Handa said. “Either look at your rates or invest in the property, or both.”

A big pile of challenges
Other challenges will confuse the issue and include staffing, panelists said.

“Business rates, minimum wages, and in the regions, where will (increases in) ADR come from?” Handa said. “Efficient investment in technology and revenue management to get more out of the top line are key.”

Anscomb said it’s critical to find the right employees and take proactive steps to retain them.

“Europeans are not the only employment sector,” he said. “Build the employees you have. Value staff. Our staff facilities should not be different than public facilities, and keep ahead of legal requirements. Lower-entry jobs are the hardest ones to fill. We need to look at incentives and training.”

The overriding subject here is Brexit, panelists agreed.

“We’re waiting for a sensible solution, which might sound a little like putting your head in the sand, but as an industry and country we have to see where the (new employees) are likely to come,” said Jon Colley, head of development for the United Kingdom and Ireland at InterContinental Hotels Group. “The idea is to get people interested in hospitality and then develop them through any cycle.”

On 2 October, a week after the conference, the ruling Conservative Party said post-Brexit it would put more emphasis on high-skilled employees and not prioritize European Union citizens above any other jobseeker.

Handa suggested adding a technology component to every job description so positions are not perceived as mundane.

Ward said there are several factors contributing to labor concerns.

“All operators are feeling cost pressures,” she said. “What’s happening is a perfect storm, with business rate and wage increases, food-inflation costs, increased utilities. Whatever growth they’re seeing on the top line is being somewhat eroded on the bottom.”

Deals, development
Panel members said they’re prioritizing keeping busy, seizing opportunity and better serving guests with new experiences.

“We have Kimpton (Hotels) and the first few Voco-branded hotels coming to London, which is very exciting,” Colley said. “Twelve assets. These are leases, although there might not be too many more of those. We have to think outside the box as to how to engage, and you have to back yourself.”

Handa said there are opportunities in buying and using modular supplies.

“That reduces the equity. Structuring deals correctly is so much more important now,” Handa said.

Anscomb gave an example of finding a unique solution to a problem.

“Opportunity in Leicester Square (London) is limited so you have to, excuse the cliché, think outside of the box,” he said. “Sightlines are protected, so we dug down 35 meters, which required equipment not available in the U.K.”

He added the new property he was referring to would operate as an independent.

“That allows us to have exciting public spaces and more focus on F&B,” he said. “You must worry about your product being the most relevant within the demand for that market.”

Ward said U.K. transaction volumes were up 80% already in 2018 through June, stemming mostly from U.S. key funds exiting.

“Starwood Capital, Apollo, Lone Star have exited,” she said. “The sentiment is longer-term capital looking to invest, and PropCos are winning a lot of the battles because of their lower cost of capital and their longer-term views. And we’re seeing the merging of hotel segments within the same box. This has everything to do with experience and the flexible lifestyles millennials and others have, and we will see more ways in which investors look at how to use space differently.”

Ward said institutional growth is coming from real estate funds, real estate investment trusts, longer-term capital such as family offices and from the Middle East, notably from Israel.

“It will also come from Europe, but U.S. private equity is struggling to see the return numbers they require,” Ward said.

Capital still has a struggle to find properties.

“Values are holding up, and sellers are waiting for robust prices. It all comes down to how much we can move the needle,” Colley said.

Ward said this will require even more ingenuity.

“I receive three calls a day asking me to find a hotel in London with more than 5% yield, and I say, ‘No, you will not find it,’” Ward said.

No Comments

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.