The world of hotel investment in the first half of 2023 has been dominated by continued interest-rate increases, including by the Bank of England, which has increased the United Kingdom's interest rate 13 times since December 2021.
U.K. inflation in both April and May of this year stood at 8.7%, a median that does not consider volatility such as energy and food price increases.
These economic challenges have had a huge effect on hotel transaction volumes.
A notable bid-ask spread, something not unique to the U.K., has resulted in a lack of willingness among sellers to exit at a discount and buyers to buy at overinflated prices. Meanwhile, hotel average daily rates are soaring but so are operational costs.
Following several years in which U.K. interest rates hovered around the 0% mark, the metric returned to 1% in May 2022 and by November 2022 had reached 3%. Interest rates stand at 5% following the most recent increase on June 22.
To provide historical context, the last time interest rates were at 1% was February 2009, and the last time they were at 5% was April 2008. According to Bank of England records, the highest level of interest rates was 17% in November 1979, six months following the general election win by the Conservative Party under Prime Minister Margaret Thatcher.
Recent rate increases, put into place to attempt to reduce inflation, which reached a 41-year high of 11.1% in October 2022, have softened yields as debt becomes more expensive and loan-to-value ratios have been squeezed.
This has led to investors being more cautious in investment decisions and heightened discussions of finding additional value in investments.
Added to these pressures is inflation’s effect on the cost of energy and food, which have risen by higher-than-average percentages compared to the costs of all goods and services. However, one benefit has been new spending power among international tourists who are finally coming back to the U.K. and benefit from a weaker pound sterling.
At Long Last, Distress
Some hotels could trade at distressed pricing as hoteliers find operating costs too onerous.
Malcolm Kerr, U.K.-based managing director of business advisory Horwath HTL, said U.K. and international investors are circling to pounce on discounted, distressed hotel assets but that high-quality opportunities are few and far between.
Kerr said that despite concerns around the cost of living and inflation, U.K. hotels have, on average, performed well through the first quarter of 2023, comfortably beating pre-COVID-19 levels of revenue per available room and providing owners with sufficient cash flow to cover rising costs and keep lenders at bay.
“While prospective buyers stress [the] challenges of rising interest rates and broader economic uncertainty, owners [prospective sellers] see considerable future demand growth and price their assets accordingly — typically well above what ‘opportunistic’ investors are willing to pay,” he said.
Philip Camble, director of peer business advisory Whitebridge Hospitality, said in the regional U.K. market, by far the most frequent deals have been for hotels with fewer than 100 rooms. The most common buyers have been domestic investors, typically local hotel companies and high-net-worth individuals.
“The next 12 months will remain quiet, owing to ongoing uncertainty around inflation and interest rates. Rates are now expected to hit 6% or higher before year-end because increases to date are having little impact on inflation,” he said.
There have been no significant portfolio transactions in the U.K. since April 2022 when U.S. private-equity firm KSL Capital Partners bought The Pig Hotels' nine U.K. hotels for an undisclosed price from owner Home Grown Hotels. Also, Tristan Capital Partners acquired a majority stake in Raag Hotels, which has 10 assets branded as Point A Hotels, for £420 million ($535 million).
Only one U.K. hotel portfolio has been sold, for an undisclosed sum. The London-based special-situations investment fund Blantyre Capital and its operating partner, Bath, England-based Fairtree Hotel Investments acquired Edinburgh-based Crerar Hotel Group and its seven hotels.
Blantyre and Fairtree started their partnership in 2021 and already own Fonab Castle and Dunkeld House Hotel — both in Perthshire, Scotland — and Daffodil Hotel & Spa in Cumbria, England.
The next deal likely to be completed is Ares Management Corporation’s acquisition of 21 Novotel- and Ibis-branded hotels, with a combined room count of 3,766, for approximately £400 million from Land Securities, more often referred to as Landsec.
The transaction is expected to close very soon, for what will be the biggest U.K. hotels deal in quite some time.
The other megadeal that might be completed within weeks is the acquisition of a 49% stake in London-based Rocco Forte Hotels by Public Investment Fund, Saudi Arabia's sovereign wealth fund.
In that deal, Italian bank Cassa Depositi e Prestiti is expected to divest its entire 23% stake, with the remaining 23% sold by the Rocco family, which will maintain majority ownership.
Core investors appear willing to sit on the hotel transaction sidelines for the time being.
What mostly have sold, however, are individual hotels, and the sweet spot seems to be in the area of £50 million and fewer than 100 rooms, although the type of hotel in the transactions listed below do range from new builds to luxury via select service.
Some of the notable deals so far in 2023 include:
Doubts Over Debt
Kerr said savvy operators recognize the potential to capitalize on underlying market demand and supply constraints by repositioning existing hotel properties.
Cautious lending from the banking sector is limiting the availability of debt in secondary locations — increasing the cost of funds and level equity required — but established groups seem well-placed to find the necessary resources, Kerr said.
He added several substantial group transactions might now be in the works in the U.K. as investors look to cash in on strong recent performance and recycle capital.
Ones to watch out for include Brookfield Asset Management’s acquisition of six hotel-vacation sites from Center Parcs; Ennismore selling three London hotels in its Hoxton Hotels brand; GoldenTree’s sale of Travelodge U.K.; and KSL Capital’s exit from Village Hotels.
“These deals, if completed, will provide a useful measure of buyer sentiment and pricing and could set the scene for further transactions towards [the fourth quarter] and into 2024,” Kerr said.
Kerr added he expects to see a steady stream of individual hotel transactions over the coming months, some of which may be distressed.
“We do not anticipate significant or broad-based discounting. Well-located assets in primary locations will continue to attract strong domestic and international interest, while [U.K. government] Home Office contracts to accommodate asylum seekers and refugees have provided a lifeline for many second-tier hotels, which may otherwise have been forced to sell,” he said.
If a prospective deal piques the interest of a buyer, its ability to secure debt has proven harder to accomplish in recent years, Camble said.
“To do a deal, banks want higher levels of equity, making any return-on-investment assessment more difficult to achieve for most buyers. Thus, most buyers likely will continue to be those with cash and/or a strategic interest in the sector, such as wealthy individuals, sovereign wealth funds and hotel companies,” he said.
“Distress requires the banks to enforce. For the moment, banks are not enforcing on any scale, and such action still seems unlikely for the foreseeable future. The net result of all this is fewer transactions, but lots of refinancing,” he added.