United Kingdom hotel transaction volumes are struggling to reassert themselves to pre-pandemic levels — a scenario that likely will not change in the short term.

The reluctance of traditional banks to provide debt is one of the main reasons for this sluggish nature. Buyers, sellers and lenders also often have conflicting views on the overall value of an asset, which can be the sticking point.

“We are seeing some transactions, but it is a fraction of what we should be seeing. … Debt is expensive, and there are few banks in the market,” said William Kirkpatrick, partner at real estate advisory firm Gerald Eve.

He added his firm has not signed on as a legal representative of a hotel transaction for a while.

“In I don’t know how long,” he said. “The buy-sell gap is the cause of so many problems.”

The above might not sound like a healthy landscape for the hotel industry, but it is just one component.

“There is limited development, but hotels have proved resilient,” said Sarah Green, director of HotelFinance.

Inflation and the cost of funds are two factors that have made the current cycle quite different from previous ones.

“The finance is there, but how does it stack up properly? That’s the question,” Green said.

Green added that when she worked for an operator, as recently as 2020, each room in a new development cost between 95,000 to 100,000 pounds sterling ($114,000 to $120,000), but now costs range between 110,000 to 115,000 pounds sterling.

“Over the last two years of the economic crisis, well, there’s been a bit of a ride, and a lack of employees,” said John Downs, partner at law firm Gateley.

Economic uncertainty and cautiousness from traditional lenders have all stakeholders acting with a degree of skittishness. Those criteria also increase the price of debt.

The hotel industry is “not quite recovered yet … and all things are not equal,” said Sarah Duignan, director of client relationships for Europe, Middle East and Africa at STR, the hospitality analytics division of CoStar.

She said global demand for hotel rooms for full-year 2022 was 5% below that of full-year 2019. Demand is calculated by the number of hotel room nights sold in a market.

In the Europe, Middle East and Africa region for the same period, demand in Europe averaged 65%, down from 72% in 2019; the Middle East was at 64%, down from 66%, and North Africa was at 54%, down from 62%.

Green said nontraditional lenders are lending but at a higher cost.

“Banks will be choosier about [what projects] they support. Location remains key, as it points to how much you can drive [average daily rate],” she said.

Other economic indicators must be kept in mind, Kirkpatrick said. He mentioned two changes that should be beneficial to hoteliers.

“Gas prices are now down to pre-[Russian invasion of Ukraine] levels, which is good news and should start filtering down to the [profit-and-loss account], and business rates in the U.K. are to fall,” he said.

Kirkpatrick added hoteliers should be careful in forecasting as economic conditions are far from certain, and costs and rates could just as easily return to higher levels at any moment.

“These changes have been a lifesaver for some, but forecasting remains very difficult,” he said.

Green said British banks have behaved sensibly and admirably during the past two or three years.

“Banks have been excellent, but they cannot have nonperforming loans on their books,” she said, adding that hoteliers must be truthful with the banks about their hotels’ earnings before interest, taxes, depreciation and amortization.

Kirkpatrick said the increasing polarization of the hotel market — with economy hotel performance improving due to higher occupancy and luxury hotel performance improving due to higher rates — should indicate where distressed pricing on hotels will originate.

“The hotels that have been managed well, especially the luxury ones, I am confident for,” he said.

He added profitable government contracts for asylum seekers and homeless individuals “have been the safety net for some hotels, but these contracts might see an end at any moment.”

“What will happen when [these hotels] return to a normal trading market?” Kirkpatrick said.

Occupancies in some markets have outpaced pre-COVID-19 levels, Duignan said, while overall average daily rates “have recovered and increased significantly.”

Hotel rates in Europe’s capital cities have for the most part risen above those of regions, a situation that will likely remain throughout 2023 and beyond, as they did in most years before March 2020.

“Usually, capital cities perform well and that raises confidence in other markets, but not in this crisis,” Duignan said, speaking of the period between 2020 and the first half of 2022.

London’s hotel occupancy, though, is the lowest of all the U.K.’s major cities, she said.

But Green said London won't stay down for long, which makes it an evergreen market for hoteliers.

“There is light at the end of the tunnel,” Green said. “It is just that the tunnel might be longer than we expected. As for London, it is on most people’s travel wish lists. [On March 1], I got turned away from three restaurants because none of them had spare tables.

Downs said the May 6 coronation of King Charles III will do much to lift London’s hotel performance.

But it's also likely that total European hotel occupancy will lag 2019 levels through the remainder of 2023, Duignan said. Average daily rates also improved for many markets, although Duignan said 2022 numbers had not been adjusted for inflation, which is currently much higher than it was in 2019.

In terms of hotel development pipeline, Dubai leads the pack, with about 35,000 rooms at some degree of planning or construction. Duignan said London has approximately 9,000 hotel rooms in its development pipeline, and approximately 1,000 of those are in the luxury segment.

One question is where labor will be found for all those hotels. Another is the cost of materials and construction.

Hotel performance success in the Middle East region last year was underpinned by large sporting events, including the FIFA World Cup 2022, Formula 1 Grand Prix races in Abu Dhabi, Bahrain and Saudi Arabia and the Anthony Joshua-Oleksandr Usyk heavyweight boxing world championship contest in Saudi Arabia.

The three most successful hotel markets in the EMEA region, in terms of occupancy, are Lagos at 111%, Addis Ababa at 109% and Istanbul at 101% of 2019 levels. Istanbul has been helped by a devalued Turkish lira, Duignan said.

Others such as Dubai, Jeddah and Reykjavik came within one or two percentage points, and Warsaw's hotel occupancy matched 2019 levels.

Return to the Hotel News Now homepage.