UK hotel opportunities remain alive and kicking
 
UK hotel opportunities remain alive and kicking
02 OCTOBER 2017 7:41 AM

The United Kingdom remains attractive to domestic and global investment, with London still king but the rest of the country increasingly being regarded as not one bucket, but many. 

LONDON—Owners and operators are setting their sights on opportunities in Europe, and that includes both London and the regions in the United Kingdom, according to sources.

The impending effects of Brexit remain a mystery, though sources added that has not scared off capital seeking a new home.

Optimism was rife at a panel titled “Opportunities in the U.K.” at the Hotel Investment Conference, Europe, also known as Hot.E.

Philip Lassman, VP and head of development for the United Kingdom and Ireland at AccorHotels, summed up the favorable environment in a retinue of fundamentals—equal strength in rate and occupancy, good trading, uptick in development enquiries and a push to maximize revenue in public spaces.

Lassman said AccorHotels’ enthusiasm in the U.K. is most evident in its signing of a hotel in London for its Raffles brand, a 125-room conversion of the Old War Office that’s set to open in 2020.

His confidence was shared by the other panelists.

Nick O’Keeffe, development director of U.K. management firm Kew Green Hotels, said his company is “up 8% to 9% across the board, predominantly in rooms, and it is (revenue per available room) driven,” though he added he is “cautiously optimistic.”

And it is not just London.

“Manchester is back,” O’Keeffe said.

Paul Thomas, director of international development at Marriott International, also singled out Manchester.

“We had our most successful year in 2016 in terms of deals signed, and there is still massive opportunity,” he said. “In the provinces, we have a mixed estate, and we’re tracking a little lower than STR in those areas, but we’re seeing growth in franchise properties.”

Edinburgh, which “has seen 12% growth,” is another market that Marriott is watching, according to Thomas, who raised a smile when he added Marriott has the brands to deploy in those markets.

Charles Human, managing director of business consultancy HVS Hodges Ward Elliott, said that transactions in 2017 are up approximately 40% year to date.

“Apart from Aberdeen, all regional markets are up, and demand for London is as strong as I have ever known it, despite supply,” he said.

Panelists said they have also notices a resurgence in U.K. seaside towns.

Human said the next litmus test for the U.K. might be the sale of Jurys Inn Hotels, which U.S. private equity firm Lone Star is widely believed to be pursuing.

“We calculated that approximately 30% of the region’s branded hotels have changed hands, some in substantial portfolio buys, mainly by private equity,” he said. “It is inevitable they will come back to market. Jury’s Inn is a big test of the market.”

In general, investors are still looking for hotel acquisitions, Human said.

“It can be congested out there, but there will be buyers,” he said. “A year ago, few people had heard of Henderson Park, but now they’ve spent, what, £1.5 billion ($2.01 billion)? … These portfolios will eventually find homes, and they’ve all seen significant improvements in trading. Premiums could shift to provide bigger yields for buyers.”

Cycling around the margins
The one thing keeping all of this optimism in check is appetite, panelists said. If investors cannot feed on London, they will look to the regions, even if they’re watching their calories.

“Investors are starting to put regional cities such as Liverpool, Edinburgh, Oxford and Cambridge into separate buckets,” Lassman said.

He added it’s more important than ever for hoteliers to recognize new trends before their competition does.

“You’ve got to be smart. Do not focus on destinations without having a story behind it,” Lassman said.

Astuteness is needed, panelists said, because investment is coming from everywhere.

“Fifty percent of capital investors have been domestic, which is higher than it has been,” Human said. “Then it is Asia, some North America, a few Middle Eastern investors. The common theme is that it is long-term investment, and that will continue. That is where we are in the cycle as it’s harder for someone with the three-year hold to find the necessary margins.”

He added there’s also pent-up demand from China following recent restrictions on its outbound capital.

“London hotels’ valuations will remain flat, but that is still very high,” Human said. “There has been no impact on cap rates, but only marginal gains on values. That is not what we saw in the last three years. I do not think we are at the top.”

Thomas said he sees the most opportunity for growth in franchising and the select-service sector.

Reduced margins are affecting the regions, too, O’Keeffe said.

“There are fewer people bidding in the regions and fewer turnaround deals,” he said. “Investors are searching harder for the margins they desire, and it all gets thinner in deals above £20 million ($26.8 million).”

O’Keeffe added that private equity is searching ardently for portfolio deals, but there remains space for all.

“We’re still in there, too,” he said. “There are holes in the map, in London, university towns.”

Worry, of course
Labor, and the cost of it, tops the list of worries for hoteliers in the U.K.

“If you do not have anyone to check you in and serve you coffee, there is little point talking about pipeline,” Lassman said.

“Our concern for the future is in terms of cost pressure,” O’Keeffe said.

He added that supply is a concern in some markets.

“Manchester has absorbed new supply, and some of the airport locations have settled down,” he said.

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