British real estate investment trusts generally buy into hotels as add-ons to wider asset-class portfolios, but the pandemic is making some reconsider the risk involved.
REPORT FROM THE UNITED KINGDOM—Real estate investment trusts in the United Kingdom are looking at the hotel asset class as inherently risky at the moment.
One REIT, Real Estate Diversified Income, or RDI, is looking at the future of its hotel portfolio, according to a recent article in CoStar News, owned by STR’s parent company, CoStar.
Among the REIT’s owned hotels are five properties under the flag of Travelodge (U.K.), which is undergoing an internal change following a decision to ask member landlords to sign a CVA to reduce rents as a means to securing its financial future. Some landlords did not agree to the changes and had until 18 November to agree to stay with the brand, or to become independent or aligned with a new brand.
RDI in its 2019 annual report stated those assets brought in £2.4 million ($3 million) in annualized gross rental income and that all of its 13 other hotels assets are managed by its associate RBH Hotel Group, of which it owns 27.4%.
Stephen Oakenfull, RDI’s CEO as of 5 November, said the firm has approximately £309.7-million ($410-million) worth of hotel assets in the U.K., but it is increasingly favouring other asset classes.
He added 26.5% of the current portfolio is invested in hotels.
Mat Oakley, head of European commercial research at business consultancy Savills, said few U.K. REITs own hotels as a percentage of their overall holdings.
“As a rule, REITS in the U.K. fall into two buckets—those highly specialized in one asset class, such as Big Yellow Group in self-storage, and those that are more generalist, such as RDI,” he said.
Oakley said in the U.K., it is those generalist owners that mostly own hotel assets.
“Those generalist REITs, if they are sitting around their strategy tables, probably are saying that hotels will be facing much of the same challenges as retail. They regard hotels as retail anyway in the grand scheme of things, so they might be thinking why add more risk to the risk we already have.” Oakley said.
“Even most generalist REITS lean to retail. At the moment, the No. 1 priority is charting a passage through their future,” Oakley said, adding that the pandemic has had an effect on hotel real-estate valuations.
REITs are relatively new to the U.K., having been permitted since January 2007.
Those favouring the vehicle said the advantages of a REIT structure include reduced transaction, liability and taxation costs, and access to liquidity and high-value assets.
Most taxable income deriving from REITs is distributed to shareholders in dividends and thus are exempt from corporation taxes.
Access to capital markets is a key tool of growth for the sector.
Currently, 50 REITs are listed on the London Stock Exchange with a market capitalization of more than $70 billion.
Secure Income is the largest U.K. REIT in terms of hotel portfolio, which includes 123 Travelodge properties.
Other British REITs with considerable hotel interests are Landsec, which has 21 hotels all managed by Accor under its Ibis and Novotel flags; and LXI Reit, which has 19 hotels (including 12 under the Travelodge flag and five Premier Inns) and budget hotels making up 24% of its overall portfolio.
LXI has acquired all its hotels since 2017.
Oakley said during the pandemic, U.K. REITs are increasingly aware of the risk of landlords struggling to pay rents and that inbound capital into them is shying away due to ForEx not working in their favour and buyer-seller spreads regarding hotel valuations being in their eyes unrealistic.
Osmaan Malik, managing director and global head of real estate at UBS Investment Research, said in a note to Hotel News Now that hotels performed the worst of all asset classes for REITS, declining 44.3% year over year numbers for the week ending 5 November.
In “one-year performance, the industrial sector performed strongest at +20%,” he wrote.
Retail also performed poorly, declining by 40.9% in the same period, he added.
REITs generally view hotel assets as an extension of their retail ownership, Oakley said.
Malik said for the month up to 5 November, the best two performing asset classes were industrial, which fell 1.2%, and hotels, which fell 1.7%. Office (-6.8%) and retail (-4.2%) performed the worst.
The asset class seemingly with most promise, according to sources, is logistics, which before the pandemic was within the “speciality” category. It includes warehouses and distribution centers, which have benefitted from a rise in online ordering.