UK Hotel Capital Markets - UK hotel investment defies expectations, recording £6.0 billion of investment in 2019 - Knight ...
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UK hotel investment defies expectations,
recording £6.0 billion of investment in 2019
UK Hotel
knightfrank.com/research
Capital Markets
Investment Review 2020
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TRANSACTION
or agreeing to pay higher multiples of owners, continuing to enjoy a robust completing during Q4 totalled over £560
EBITDA. Stripping out the effect of the trading environment, postponed decisions million, representing 42% of the total
OVERVIEW
£1 billion sale of the Grange portfolio and about bringing assets to market. annual single asset transaction volume.
excluding all development and ground Meanwhile portfolio investment in Q4
During the final quarter of 2019, hotel
lease transactions, the average transaction totalled over £510 million, representing
investment once again turned up a gear,
Despite investment activity dampened by Brexit related uncertainty price per room sold throughout the UK 21% of the total annual portfolio
with approximately £1.5 billion of deals
and a turbulent political landscape, full year 2019 UK hotel remained on par with 2018 prices, with investment activity.
completing, equivalent of 25% of the total
investment defies expectations, recording £6.0 billion of investment. just over 1% growth at £168,000 per room.
transaction volume. Single asset deals
This scarcity of supply for sale, and indeed
lack of investment grade hotel product,
has continued to fuel strong interest in
hotel development, with over £1 billion of
funds invested in sites deemed suitable
for hotel development or forward funding
of future hotel projects. Some 28,000
new hotel rooms are currently under
construction in the UK and due to open
PHILIPPA GOLDSTEIN during 2020, equating to a 4.2% increase
HOTEL ANALYST
in supply and with a further 15,000 new
rooms under construction and set to open
by 2022.
T
uu
his impressive level of investment Following an exceptional level of to the previous year to approximately
activity was achieved as a result of portfolio activity in 2018, year-on-year £17.8 billion, comparable to the level of The average transaction
continued strong demand from investors hotel transaction volume slowed by £1.2 investment in offices, but by contrast price per room sold
seeking long term, secure income billion for the full year 2019, equivalent all other mainstream property types throughout the UK remained
streams; institutional investors seeking of a 17% decline, but witnessed a decline witnessed steep declines in investment. on par with 2018 prices at
a diversified portfolio with alternative of only 3% compared to the 5-year mean Robust levels of hotel investment by £168,000 per room.*
property types favoured ahead of other average of £6.2 billion. institutional investors, rising by 26% in
(*excludes the Grange portfolio, developments
mainstream property; and changing long- 2019, reinforces the amount of capital and ground lease transactions)
The weight of capital invested into
term positive drivers, such as growing being allocated to alternative income
alternative property types during uu
demand to spend on experiential travel assets in pursuit of greater portfolio
2019 was significant, with the level of
and location based experiences, shaping diversification as well as targeting assets The Hare & Hounds Hotel, Tetbury. Knight Frank advised on the sale of Cotswold Inns & Hotels,
investment rising by 4.8% compared Hotel investment topped and tailed the sold to Fullers Plc for £40 million.
the future of the sector. and sectors with the greatest scope for
year. The first quarter of 2019 saw the
income growth.
greatest share of deal volume, with £2.6
In 2019, a scarcity of assets for sale in billion of deals completing during the Fig 2: UK hotel investment volume per quarter 2018-2019
Fig 1: UK total hotel investment volumes 2011-2019
the hotel sector resulted in a declining first three months, equivalent of 44% of
Single asset Portfolio Investment Development Single asset Portfolio Investment Development
market share of the hotel asset class the total transaction volume. This was
9-year average investment volume Market share per qtr
in the UK Specialist Property Sector, driven by a significant volume of portfolio
9,000 3,000
contributing 28% of the total investment activity, totalling over £1.6 billion and
8,000 44%
volume, with rising investment levels which accounted for 62% of the annual
Transaction volume million (£)
2,500
7,000
from student accommodation and the £2.6 billion of investment in portfolio 30% 31%
6,000 2,000 27%
healthcare sector. Confidence in the transactions. Nevertheless, the £1 billion
5,000
25%
hotel sector remains strong, driven by a portfolio sale of four Grange hotels located 1,500
4,000
3,000
resilient trading performance and greater in London, masked the wider national 1,000
18%
13%
2,000 understanding of the fundamentals trend of a slowdown in hotel investment. 13%
500
1,000 of the UK hotel sector. A shortage of A lack of clarity over the UK’s position
0 opportunity to purchase, combined outside of the EU, combined with a 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 with a wider pool of investors has led turbulent political climate, led to minimal Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019
Source: Knight Frank Research to certain buyers either compromising investment during Q2 and Q3, as investors Source: Knight Frank Research
on the type of opportunity purchased deferred their investment decisions and
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HOTEL INVESTMENT demands, such as quarterly DSCR (debt-
service coverage ratio) tests. A dent in
hotels and certain other London assets
transacting as part of a wider portfolio
development and ground leases) –
facilitated by the fact that 74% of
TRENDS revenue could potentially throw the
borrower into default.
sale. Increasingly, single asset hotel
transactions in London have sold
London’s transaction volume involved
a five-star asset. The sale of the four
off-market, as hotel owners reap the Grange hotels, which accounted for 47%
Nevertheless, these CMBS structures
rewards of a relatively strong trading of London’s total investment volume,
show that there is sufficient demand for
“Thou Shalt Not Sell” sentiment stunts investment levels in 2019 environment, choosing to sell only if the contributed significantly to this rise in
investment in open-ended real-estate
proposition of a sale meets or exceeds the average transaction price per room,
debt by investors seeking to increase
their price expectation. achieving a selling price of £765,000
their portfolio allocation of illiquid
per room.
W hilst a broad range of buyer
profiles has cushioned the impact
challenges of redeploying capital once
a property has been sold. With strong
CMBS, collateralised by a senior
loan extended to Thailand’s DTGO
secured debt. In 2019, London recorded a total of
£2.7 billion investment for all types of In 2019, London hotels continued to enjoy
of slowing investment activity, the and growing demand for investing Corporation for its acquisition of the UK London – subdued investment hotel transactions. This represented a a solid year of RevPAR growth, buoyed by
political uncertainty engulfing the British in specialist property, retaining the Marathon portfolio; meanwhile, Morgan volume, declining by 11% decline of 11% in transaction volume, continued strong inbound visitor arrivals.
economy during 2019, resulted in some allocation in hotel real estate can be Stanley launched the £350 million year-on-year when compared to 2018, but a rise However, with rising operational costs
investment decisions being put on hold. difficult due to the strong competition CMBS for London & Regional's UK hotel of 10% compared to the investment and only marginal growth in GOPPAR,
Despite the significant quantum of new
from a widening pool of buyers. During portfolio. Both of these structures are volume recorded in 2017. Excluding this has provided the impetus for owners
Continued low interest rates and hotels opening, London’s resilient and
2019, holding the asset for longer has leveraged at around 60% - 65% LTV. A developments, London witnessed some to consider a potential sale.
extended hold periods are some of the robust trading performance, standing
been the route of choice, however, key advantage of these interest-only 31 deals completing, recording a fall
factors influencing an existing owner’s as one of Europe’s top performing hotel In total, 18 single asset hotels transacted
where a sale has been actioned, the loans is that they offer lower debt service of 17% in terms of transaction volume,
decision to review their investment markets ensures that the city remains as a going concern in London in
underlying reason has been the need payments, freeing up cash flow and whilst the number of hotels transacting
portfolio and to consider options attractive to hotel investors. 2019, recording 17% of London’s total
for liquidity, often disposing of non- providing the borrower with liquidity to declined by 30% and hotel bedrooms
other than a sale. Indeed, persistently investment volume, with an average
core assets in order to raise capital to refinance existing debt and finance for Whilst scarcity of assets for sale and exchanging hands fell by 35%. Despite
low interest rates have instead transaction price of £402,000 per room.
fund development projects or finance planned investment projects. However, continued yield compression prevents the fall in investment, London’s share
navigated owners to unlock attractive Whilst this represents a 10% decline
refurbishment programmes. they are not without their risks, because certain buyers from accessing the of total UK hotel investment volume
financing terms as a late cycle strategy. in the average transaction price per
a CMBS loan not only requires the debt market, London has witnessed a increased to 43%, with the transaction
Furthermore, strong competition in the room, it is important to note that there
In 2019, significantly increased activity to be serviced on time, but borrowers are healthy investment market, boosted price per room increasing by 41% to
debt market has further widened the were no big ticket sales. By contrast, in
was recorded involving Commercial burdened with rigid cash management by the portfolio sale of four Grange approximately £457,000 (excluding
choice for borrowers, thereby facilitating
Mortgage Backed Securities (CMBS),
the route to refinance.
effectively non-recourse loans which
Exit strategies are also being reviewed enable increased liquidity. In late Q4,
and hold periods extended due to the Goldman Sachs launched a £300m
Fig 3: UK hotel transactional activity London v regional UK 2011-2019
Regional UK London 9-year average regional UK 9-year average London
9,000
8,000
7,000
6,000
£ Million
5,000
4,000
3,000
2,000
1,000
0
2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Knight Frank Research
Knight Frank advised Kennedy Wilson on the sale of the Fairmont St Andrews. Acquired by the Hong Kong investor Great Century Hotels, off a guide price of £55 million.
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2018, The Beaumont hotel transacted
at approximately £2 million per room.
A sharp decline in portfolio transactions
(both transactions sold as a going Fig 4: UK hotel investment OVERSEAS
INVESTMENT
2019 by grade volume v rooms
A further 13 hotels transacted in 2019, concern and as an investment sale)
as going concerns, as part of various was the underlying catalyst for the Rooms Volume
portfolio deals, accounting for 41% significant fall in regional UK investment 2-star 3-star 4-star
of London’s total transaction volume in 2019. Portfolio transactions Budget 5-star Apartment
1%
(versus 21% market share in 2018). represented 35% of total regional
investment, (compared to 53% in 2018), 3% 10% Brexit uncertainty limits overseas investment activity
On the decline in London during 2019,
with the transaction volume declining 1%
was the volume of investment deals,
by 47% to £1.1 billion, compared to the 12%
which recorded a 62% fall in investment 12%
previous year. However, the average
with both the number of deals and 35%
transaction price per room increased by
I
30% 40%
volume of fixed and variable leased 44% n 2019, overseas buyers invested over £450 million, the current strength of the other activity from the Middle East,
16% to £147,000, due to fewer limited
assets declining. A lack of quality core £2.0 billion into the UK hotel market, Thai baht against the pound, combined but accounted for less than 1% of
service portfolios transacting.
investment grade stock becoming more than halving their investment with the potential for achieving a greater overseas activity.
available, is the over-riding reason for a The number of single asset investments 11% compared to the previous year, with return on equity in the UK than compared
Inbound capital from North America
decline in fixed lease asset transactions. in regional UK also fared less well 73% of overseas investment targeted at to other Asian markets, were significant
declined steeply, representing just 4%
Furthermore, the ongoing Brexit in 2019, recording 77 hotel deals, Source: Knight Frank Research regional UK and 27% towards London. considerations for securing this deal,
of overseas investment, compared to
induced uncertainty, with the threat representing a 24% decline in the Overseas investors accounted for just which equated to 75% of the total
£1.5 billion of investment the previous
of a no-deal Brexit, led to a significant number of hotels changing hands 35% of total investment activity in the UK investment volume from East Asia.
year when Brookfield acquired the SACO
number of investors, in particular compared to 2018. However, a varied in 2019, compared to 68% in 2018, with
portfolio for £457 million. Over half of the
European and North American and deepening pool of investors and Across all regional UK hotels investment severely restricted by a lack of uu
investment from North America came
investors, to defer their investment diverse sources of capital seeking to (excluding developments and ground suitable opportunities and the uncertainty
Overseas investment from one buyer, AJ Capital Partners,
plans in London and the UK. invest in quality provincial stock, have lease transactions), the average brought about by Brexit. Overseas
halved in 2019 accounting who completed on three single asset
contributed to a surge in the average transaction price increased by 20%, to investment accounted for 46% of total
Regional UK – Declining for just 35% of total UK transactions in the cities of Oxford,
transaction price per room. As such, approximately £146,000 per room. regional UK transaction volume, attracted
portfolio activity tempers investment, due to Brexit Cambridge and St Andrews. The purchase
in 2019, the transaction price per room by greater yield potential than compared
investment levels A more detailed review of the types of uncertainty and a lack of of the 70-room Macdonald Rusacks
for single asset hotels transacting to London, where the share of overseas
hotels transacting by star-rating, shows quality product, which Hotel in St Andrews as a development
The total volume of hotel transactions in regional UK increased by 40% to investment fell to just 20%. By contrast, in
a correlation between development offered investors an opportunity is an example of the value-
in regional UK equated to £3.2 billion, a £168,000, with total investment volume 2018, overseas investment accounted for
trends and investment activity. Given acceptable level of return. added opportunity that certain overseas
decline of some 20% compared to 2018, of around £875 million, 5% ahead of the 81% of the transaction volume in London
the long-term shift, where there is investors seek as a compelling reason for
but equalling the level of investment transaction volume recorded for single and 58% in regional UK. uu
increasing consumer demand for their investment in the UK.
recorded in 2017. assets in 2018.
experiences and focus on lifestyle In 2018, inbound investment from Europe
hotels, this offers a compelling increased phenomenally, exceeding A second significant acquisition made by
opportunity for investors. £2 billion and accounted for 27% of an Asian investor involved the purchase
the total overseas volume, due to the of the Fairmont Hotel in St Andrews to Fig 5: Buyer origin
An analysis of regional investment 2019 v 2018
significant portfolio acquisitions from the Hong-Kong based purchaser Great
during 2019, revealed the 4-star sector
Covivio and LRC Europe. By contrast, Century Hotels. Knight Frank represented 2018 2019
increasing its market share, capturing
in 2019 European investment fell to the seller Kennedy Wilson, with the UK Middle East European
62% of all regional UK transactions East Asia North America Other
approximately £665 million, equivalent of asset transacting off a guide price of £55
(excluding developments), of which 66% 1%
an 11% share of total overseas investment. million. This activity outside of London
of the investment in the 4-star sector 4%
supports the trend of strong demand for
was acquired by an overseas buyer. Investment from East Asia was the 10%
quality provincial hotel opportunities 1%
Meanwhile, as budget operators extend only region from which UK inbound
from a diverse group of buyers, despite 65%
their regional presence in smaller towns investment achieved respectable growth, 11% 21%
investment levels in 2019 being subdued. 32%
and cities, and further reinforce brand with £600 million of investment, doubling 4%
presence through multiple hotels in its investment compared to 2018 and Total investment from Israel accounted
9% 27%
14%
larger cities, the branded budget sector, contributing 10% of the total transaction for an 8% share of overseas investment
which offers investors long-term, secure volume from overseas investors. This into the UK hotel market, this activity was
income and strong covenants, has growth, however, was largely due to the dominated by acquisitions made by
generated a further 19% of regional hotel investment by Thai conglomerate DTGO, a single investor, the HNW family office
transactions, with 81% of the investment with the acquisition of the Marathon of the Dayan family. Investors from Source: Knight Frank Research
The Close Hotel, Tetbury (part of the Cotswold Inns & Hotels portfolio which sold for £40 million, with the seller
represented by Knight Frank.) backed by a UK investor. hotel portfolio. At a transaction price of UAE and Egypt accounted for the only
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ADVENTUROUS education system is advanced and
mature, and relatively similar to the
JOURNEYS, AJ American system.
CAPITAL PARTNERS
The UK offers significant opportunities
and growth potential to develop the
Graduate brand on an international
scale. We are excited to launch
Phillip Allen, Chief Development Officer Graduate in the UK, with the opening
of our new Cambridge and Oxford
properties in the spring of 2021. The
St. Andrews Rusacks Hotel is located
What makes the hotel Founder and CEO, Ben Weprin, created centuries! The Graduate collection
in one of the most iconic golfing
sector attractive and what and launched in 2014. Our domestic celebrates the alumni, traditions and
destinations in the world, and it will
percentage of your investments portfolio comprises a collection of distinctive character of each university
remain an independently branded
comprise hotels? twenty-two Graduate boutique hotels community where we have a hotel, and
boutique hotel, but will also go through
and five independent, boutique hotels. the universities in the UK provide so
Hospitality investment is our “raison a complete renovation.
We have an additional eleven hotels much to work with in that regard. We
d’etre” and virtually all of our
under development. like to say that we tell stories through
investments are in this sector. We are What is driving future
design, and there are plenty of stories
passionate about hotels because they are acquisitions?
Specifically – Why invest in to be told when you are dealing with
fun, fascinating businesses that allow for
the UK today, what makes it universities that are several centuries We typically seek to acquire under- characteristics, in high-growth and high-
a degree of creativity that is hard to find
an attractive proposition? old. Our strategy in the US is to offer utilized real estate in irreplaceable culture communities. Through our in- uu
in other asset classes. We are a vertically
the best, most distinctive hotel in locations. We work tirelessly to create depth market knowledge and expertise,
integrated hotel owner, operator As Americans, we are fascinated by The UK offers significant
university-anchored communities. timeless and authentic spaces that our intensive capital investment and
and real estate developer, operating the history and character of so many opportunity and growth
We believe that model will also work connect meaningfully with the local our bespoke design, we aim to make
in dynamic markets and delivering British towns and universities. The potential to extend our
in the UK. Of course, there are no community, as well as to both domestic the ordinary, extraordinary, creating
distinctive projects. We own and operate first American university was founded successful model and build
language barriers and the UK higher and international visitors. We are a something unique and special. Our aim
the Graduate Hotels brand, which our in 1636 – Oxford has that beat by five a platform from which to
private equity funded company, and of is to unlock the unrealized potential
launch and develop the
course our investors have certain return in each asset, through thoughtful
Graduate brand in the UK.
expectations. But we are not short-term restoration and bringing to life the
investors. Our aim is to reimagine and charm, architecture, surrounding setting uu
redevelop assets that may not be living and history of each property.
up to their potential. We want to bring
them back to life and to hold them for What are your thoughts
the medium to long-term. Whether concerning Brexit? What markets are you currently
a property is part of the Graduate focused on in the UK?
I can’t add anything to the Brexit
collection or not, it will benefit from
discussion that hasn’t already been Like everyone else, we would love to be
our incredibly talented creative team,
said, and, as an American, I don’t think in London, but the competition is keen
which provides bespoke design of every
I should try. I will only say that we are there, and we’re going to be patient to
element of each hotel.
sanguine about the long-term future of find the perfect opportunity. We are
travel and tourism in the UK. The things interested in most of the other major UK
What are the key
that make this country great for those markets, including Leeds, Manchester,
characteristics you look for
of us in the hospitality business – the Liverpool, Edinburgh, and Glasgow,
in a hotel acquisition?
history, traditions, culture, architecture, but we are also looking at some smaller
Location is critical. For the Graduate and natural beauty – are not going university-anchored towns such as
collection, we need to be near a to change because of Brexit. We’re Durham, Exeter, and York. We’re hopeful
significant university. We love historic committed to growing our business that we will find a few projects where we
university towns and cities that benefit in the UK and we think the future is can partner directly with the universities,
from attractive supply and demand brighter than ever here. as we have done successfully in the US.
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LAKE MERRITT UK revenue management and asset
management opportunities. We forge
following an acquisition, through our
revenue management skills, we may
How do you typically finance your
acquisitions and how accessible
INVESTMENTS strong relationships with 3rd party
asset managers locally, but we are
seek to reposition the hotel to achieve
our goal of income growth.
do you find the debt markets?
We fund all our acquisitions with debt
also focused on building a specialist
and equity. We secure debt finance on
platform and team, having our own What limitations are there
Prab Thakral, Advisor to Lake Merritt competitive terms from UK traditional
expertise on the ground. We operate which could potentially
banks, with whom we have developed
independently branded properties, prevent you from achieving
good relationships.
which we consider provides the best your investment criteria?
efficiency for the markets in which
The significant strengthening
we operate, without overloading the uu
of sterling and continued yield
What makes the hotel continues to be weak against the Thai increasingly shift towards maximizing business in costs. In essence we adopt a
compression are two factors which We operate independently
sector attractive and what Baht and the US Dollar. Our focus is on valuation on exit. value-added approach.
we need to keep on our radar, as both branded properties, which
percentage of your investments regional UK, which we consider offers
have the potential to undermine the we consider provides the best
comprise hotels? the most attractive yields. What are your target returns In terms of strategy, what
returns that we require. Our main focus efficiency for the markets in
for investors, are your segment of the hotel market
Lake Merritt UK Investments have a is on the UK, in particular secondary which we operate, without
How has your investment investments largely income are you targeting?
£25 million (equity) closed-end hotel cities, which present an opportunity to overloading the business in
criteria changed over driven or geared towards
property fund, with capital raised Our investments focus on three-star or achieve higher cap rates than compared costs. In essence we adopt a
time and what is driving growth in the capital value?
primarily from HNW Asian investors. four-star products, often select service. to key Asian cities. There is always the value-added approach.
future acquisitions?
The fund is entirely focused on We are primarily income driven, Currently we focus on investments potential, however, to look beyond the
uu
investing in freehold and long-term Our investment criteria has remained which is achieved through exploiting geared towards the mid-market, but UK for our future funds.
leasehold UK hospitality assets. We the same since inception of the fund
currently have three hotels in the which we launched over 2 years ago.
fund and we are actively undertaking We seek to invest in secondary cities
due diligence on two more potential or the outskirts of primary cities which
acquisitions. The fund has additional benefit from strong connectivity and
capacity, with potential for a further demand drivers and accessibility to
three hotels. Lake Merritt is now raising international visitors. We typically
its second closed-end hotel property seek smaller lot sizes compared to
fund, aiming for a first close of £50 other investors. Of particular interest
million equity, with a target AUM are assets in distress, under invested
(assets under management) of £100 or a change in circumstances, where
million, providing capital for a further we consider there is strong potential
10 to 15 hotel acquisitions. for asset management and revenue
management opportunities. We
Specifically – Why invest in firmly believe that this strategy will
the UK today, what makes it an ultimately provide us with the greatest
attractive proposition? return on investment. Any investment
must exceed a certain yield threshold
The UK is generally considered to be
and targeted returns for investors need
stable, in the medium to long-term.
to be in the mid-teen range.
By investing in the UK we achieve
enhanced geographical diversification
What are your expectations
and improved cash-on-cash return
in terms of hold period?
on equity, compared to key Asian
markets. We are seeking to capitalise We plan to keep hold of all assets in
on the opportunities presented by the the fund for a minimum period of five
prolonged uncertainty surrounding years. We have no plans for an early
Brexit, which is negatively affecting the exit. Our current focus is on acquiring
appetite for traditional private equity, assets to ensure the fund is fully
therefore creating a scenario of less invested. As we move closer toward
aggressive pricing and where sterling the fund’s maturity, the focus will then The 78-room Hydro Hotel, Windermere, acquired by Lake Merritt Investments in April 2019.
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INVESTMENT STRUCTURE assets, representing some 27% of total
divestment, followed by the UK Private
Fixed lease investment dampens Despite continued strong demand for
long-term, secure income streams,
KEY TRENDS
During 2019, the fixed lease sector
Hotelier investor group which represented this decline in fixed lease investment
witnessed over £820 million of
a further 19% of disposals. can be attributed partly due to a lack
investment, equating to 16% of the total
of investment grade opportunities
UK transaction volume and was ranked as
becoming available, but also partly
Vacant possession transactions the second largest investment structure.
due to covenant congestion. This is
on the rise Fixed lease investment activity fell by
UK institutional investors ranked as top UK buyer an emerging trend, whereby certain
43% in the UK during 2019, due to a lack
Hotels that sold with vacant possession funds have reached saturation point of
of sizeable portfolio transactions, with
represented the largest group of hotels in certain covenants within an asset class,
the shortfall of £600 million split roughly
the UK changing hands in 2019, in both but with increased appetite to acquire
50:50 between London and Regional UK.
T otal institutional investment
into the UK hotel market,
scope for a secure and sustainable
income stream. Moreover, with
Meanwhile, private equity investors
continue to check out of the UK hotel
London and regional UK, with a total
value of £2.3 billion. This represented In regional UK, fixed lease activity was
core-plus and value-add real estate
investments. As such, institutional
focusing on long-term fixed income, government bonds expected to remain sector, with over £1.1 billion of divestment, a 44% increase in investment volume ranked as the second largest investment funds, with solid understanding of
totalled £2.5 billion in 2019, with at current low levels for some time to accounting for 19% of the total UK compared to the previous year and a surge structure, representing 22% of the total the hotel sector, have begun to seek
roughly a 40% to 60% split between come, investment in hotels offers an transaction volume. The majority of in its market share rising to 46% of total regional UK transaction volume, with out select opportunities to diversify
London and regional UK. Investment attractive illiquidity premium and, disposals by private equity investors transaction activity in 2019, compared to over £600 million of investment and into other segments, such as the
from UK institutional investors totalled alongside proactive asset management focused on Regional UK, which accounted 26% in 2018. accounted for 75% of total UK hotel four-star market, with either a lease in
over £2 billion, more than doubling and selective development risk, provides for 77% of the transaction volume, with fixed lease investment. In London, place or taking operational risk via a
London transactions represented over 62%
their investment compared to 2018. significant scope for income growth. private equity sellers representing 26% by contrast fixed lease investment management contract.
of the total assets sold with the benefit
Institutional investment accounted for of total regional UK divestment. The represented a 9.5% share of the capital’s
of vacant possession, some £1.4 billion,
35% of total UK hotel investment and Private Equity – One key deal combined activity of Marathon Asset total transaction volume.
and equivalent to 67% of the total London
secured the highest net capital inflows drives investment volume Management, Queensgate Investments
transaction volume. By contrast, vacant
of all investor types, with £1.8 billion of and Starwood Capital accounted for 85%
The acquisition by Queensgate possession transactions represented
institutional funds staying within the of the total divestments made by private
Investments of the four London Grange only 31% of the volume of transactions
sector. Overseas institutional investors, equity investors.
hotels for approximately £1 billion in regional UK, due to a more balanced
were the fifth most active investor type
drove investment volumes up by 80%, In addition to private equity investors, two spread of investment activity from other
with approximately £380 million of
accounting for a 17% share of total other investor groups were responsible structures, including assets sold subject
investment, contributing 15% of total
UK transaction volume, with 96% of for over £1 billion each of asset disposals. to a management agreement and ground
institutional funds and represented 6%
private equity investment concentrated The UK Corporate Investor was the largest leases, both advancing in 2019.
of total UK hotel investment.
in London. group, offloading over £1.6 billion of
The recent political turmoil and
heightened concerns caused by Brexit
Fig 7: Investment structure –
have undoubtedly been carefully total UK 2019 v 2018
considered by institutional investors, Fig 6: Total UK hotel investment volume 2019 – by investor profile
(Buyers v sellers) 2018 2019
along with specific macro-themes,
Vacant possession Managed
particularly the low interest rate Buyer (LHS) Seller (LHS) Buyer – average price per room transacted (£) (RHS) Fixed lease Ground lease
environment. Given that institutional Long leasehold Franchised
2,400 600,000
Managed/franchised
investors operate in a highly regulated
Average price per room transacted (£)
Variable lease
2,000 500,000
environment and the principles of
Transaction volume (£million)
1%
alignment and transparency are 1,600 400,000 2%
5%
fundamental to the core of their business,
1,200 300,000 46%
the level of investment recorded during 16%
14%
2019 and consequently their increased 800 200,000 26%
9%
exposure into UK hotel real estate,
400 100,000 4%
17%
confirms that they are cognisant of the
17% 4% 23%
risks and opportunities involved. 0 0
Private
equity
HNW
family
office
Overseas
corporate
investor
Overseas
institutional
investor
Overseas
corporate
hotelier
Overseas
hotel
focused
investment
company
UK
institutional
investor
UK
corporate
investor
UK
corporate
hotelier
As such, hotels as an asset class that 13%
are on fixed lease interests continue to
be considered as one of most attractive Source: Knight Frank Research Source: Knight Frank Research
Knight Frank advised The Kaleidescope Collection on the sale of No.15 Great Pulteney, Bath.
sectors within real estate, offering great Sold to a private UK hotelier.
12 13
U K H O T E L C A P I TA L M A R K E T S 2 0 2 0 U K H O T E L C A P I TA L M A R K E T S 2 0 2 0
Robust growth in London’s
average transaction price
Fixed lease and long leasehold
transactions have also witnessed a fall in
per room. Meanwhile, the Schroders
acquisition of the Sofitel London Gatwick
HOTEL INVESTMENT
TOP 10 REGIONAL UK
per room? the average transaction price per room in
2019 - which in 2018 witnessed the sale of
contributed almost exclusively to the
150% rise in the average value per room
BY UK REGION CITIES FOR HOTEL
Headline numbers indicate strong growth INVESTMENT 2019
in London’s average transaction price
the long-leasehold interest of Beaumont
Hotel (selling at close to £2 million per
of long leasehold assets in regional UK.
(EXCLUDING LONDON)
per room, rising by 41% to £457,000
room), as well as some fixed lease SACO
per room (excluding development and
assets transacting, which elevated the Manchester ranked as the most liquid regional UK hotel market.
ground lease transactions), suggesting a Manchester
average transaction price per room sold.
resilient trading performance, combined uu Volume: £500 million
Rooms: 2,400
with a scarcity of assets for sale, allowing In regional UK, varying degrees of
A
The average transaction review of the geographical the South-East recorded a surge in the Av price per room: £210,000
sellers to hold out on price. However, a change in the average transaction price
price in regional UK distribution of investment average transaction price per room,
deeper, investigative analysis stripping per room were observed between the of £146,000 per room, by region and by city, revealed that rising by 47% to £163,000. Oxford
out the sale of the Grange hotel portfolio different structures, due largely to the increased by 20% year- Manchester was ranked as the regional Volume: £190 million
Transaction activity was particularly
and the ground lease transactions which composition of hotels transacting. For on-year. Due in part, to Rooms: 500
UK city with the greatest volume of strong in Oxford, resulting in the city
followed, reveals that London’s average example, in 2018, the inclusion of a the rising price per room Av price per room: £400,000
hotel investment in 2019, with some 13 being ranked as the second most active
transaction price per room actually number of SACO assets unduly increased paid for fixed lease assets.
transactions totaling £500 million and hotel market, accounting for a 27% share
recorded a decline of 5% to £303,000 the average transaction price of managed Glasgow
(excludes developments and ground with an 18% share of total UK regional of the transaction volume in the South
when compared to 2018. In addition, with assets, resulting in an overstated decline lease transactions) Volume: £170 million
investment. As a result, the North West East, with a total investment of around Rooms: 1,750
no sizeable transactions taking place, the in the average price per room in 2019.
uu was ranked as the most liquid region, Av price per room: £95,000
average price per room for hotels selling Significantly fewer corporate hotel £190 million. The properties transacting
despite lower investment in Liverpool. included the sale of the remaining
on a vacant possession basis would have transactions subject to a franchise
Meanwhile, the city of Chester recorded two Principal hotels to Covivio, the
Gatwick Airport
resulted in a decline of almost 30% to agreement took place in 2019, resulting
a significant uplift in activity due to Volume: £150 million
£321,000 per room. in a 22% fall in the transaction price Macdonald Randolph acquired by AJ
Rooms: 518
three hotels transacting as part of larger Capital Partners and Belmond Le Manoir Av price per room: £290,000
portfolio transactions. Quat’ Saisons transacting as part of a
Fig 8: Average price per room transacted 2019 v 2018 by investment structure – London (£) The South East of England (excluding portfolio deal acquired by LVMH. Cambridge
London) was ranked as the UK's second One further sizeable asset which Volume: £135 million
2018 (LHS) 2019 (LHS) % Change in value (RHS) Rooms: 430
most active region for hotel investment, transacted in the South East was the sale
Av price per room: £315,000
% Change in transaction price
900,000 60% with transactions of over £700 million. of the 518-room Sofitel London Gatwick,
£ Average price per room
750,000 40% Whilst investment volumes in the South- acquired by Schroders Real Estate and
600,000 20%
Leeds
East were at a comparable level to 2018, BAE Pension Funds, for £150 million.
Volume: £100 million
450,000 0%
fewer hotels transacted. Albeit, with Meanwhile, to the East of England Rooms: 820
300,000 -20%
some sizeable, quality stock transacting, in Cambridge, two large transactions Av price per room: £124,000
150,000 -40%
0 -60%
Birmingham
Managed Fixed Lease Long Leasehold Vacant Possession All Asset Types
Fig 10: Regional UK hotel transactions 2019 by UK region Volume: £95 million
Rooms: 800
Source: Knight Frank Research. * All Asset Types excludes development & ground lease transactions; Vacant possession average transaction price excludes the Grange portfolio.
Av price per room: £120,000
Volume Average price per room
800,000 250,000
Chester
Average price per room transacted (£)
Fig 9: Average price per room transacted 2019 v 2018 by investment structure – Regional UK (£) Volume: £80 million
Transaction volume (£'000)
600,000 200,000 Rooms: 670
2018 (LHS) 2019 (LHS) % Change in value (RHS) Av price per room: £114,000
400,000 150,000
% Change in transaction price
300,000 150%
£ Average price per room
250,000 120%
Liverpool
200,000 100,000 Volume: £80 million
200,000 90%
Rooms: 600
150,000 60%
Av price per room: £135,000
100,000 30% 0 50,000
50,000 0%
West
North
Bristol
South
East
Scotland
Prime
Yorks & The
Humber
South
West
East of
England
West
Midlands
East
Midlands
Scotland
Secondary
North
East
Wales
0 -30%
Volume: £70 million
Vacant Possession Fixed Lease Managed Long Leasehold Managed / Franchised Franchised All Asset Types Rooms: 425
Av price per room: £162,000
Source: Knight Frank Research. All Asset Types excludes development & ground lease transactions. Source: Knight Frank Research
14 15
U K H O T E L C A P I TA L M A R K E T S 2 0 2 0 U K H O T E L C A P I TA L M A R K E T S 2 0 2 0
took place, involving the 138-room nine transactions, comprising over 1,700 hands as a result of various regional
DoubleTree by Hilton Cambridge and rooms and resulting in a transaction portfolio acquisitions. These assets Fig 12: Leading hotel transactions
the 155-room Tamburlaine Hotel for volume of approximately £170 million. included the Hallmark Hull, Hilton
£355,000 per key. Leeds City, Hilton York, The Crowne BY INVESTMENT STRUCTURE
Elsewhere, Scotland’s secondary cities Plaza Harrogate and the DoubleTree by
In Scotland, we define the region
have recorded significant transaction Hilton Leeds. As a region, the market
making a distinction between major
activity, with approximately £115 achieved an average price per room of
prime cities (Edinburgh, Glasgow,
million of investment, comprising some £116,000, an uplift of 13% compared to
Aberdeen and Inverness) and the rest
900 rooms and 12 assets transacting. the previous year.
of Scotland which we have termed as
The Fairmont St Andrews was central
Scotland Secondary. Scotland’s prime In Wales, very limited transaction
to the uplift in activity, contributing LARGEST
LARGEST LARGEST LARGEST
LARGEST LARGEST
cities were ranked as the third most activity in Cardiff resulted in a SINGLE ASSET SINGLE ASSET FIXED LEASE
PORTFOLIO GROUND LEASE D E V E LO P M E N T
approximately 45% of the investment TRANSACTION
TRANSACTION TRANSACTION TRANSACTION
TRANSACTION TRANSACTION
active region for hotel investment, substantial reduction in the region’s LO N D O N REGIONAL UK LO N D O N
in region.
with approximately £260 million of investment market, with transaction
AC Q U I S I T I O N
investment, but with no significant The region of Yorkshire & Humber was volumes declining by 89% and Paddington Site –
trophy asset sales recorded in Edinburgh ranked as the fourth most liquid region, the average transaction price per Grange Hotel Harrington Sofitel Zinc Hotel Portfolio of Premier Inn &
London Portfolio Hall Hotel Gatwick Airport Portfolio 3 Grange Hotels Wilde Aparthotels
during 2019, the transaction volume with over £230 million of investment room falling by 49%. Nevertheless, by Staycity
was significantly lower, down by accumulated from a total of 19 assets Cardiff remains an attractive city for
70%. Instead, Glasgow was ranked as exchanging hands. In particular, some investment, despite the temporary
APG Asset
IN V E STOR
Scotland’s most liquid city, with a total of significant branded hotel stock changed dearth of hotel stock exchanging hands. Schroders Hotel M&G
Queensgate Management & Vivion Investments Alpha
Real Estate (BAE Real Estate
Investments London Central Sarl Real Capital
pension fund)
Portfolio
Fig 11: Average price per key sold
IN V E ST ME N T
£1 Billion £125 Million £150 Million £246 million
Confidential £200 Million
(£765,000/room) (£622,000/ room) (£290,000/room) (£170,000/room)
Source: Knight Frank Research
Scotland Prime
£105,000 /Key
2019 Uplift: -40%
BY T YPE OF INVESTOR
Scotland Secondary
North East
£127,000/Key
£144,000 /Key
2019 Uplift: +79%
2019 Uplift: +19%
Yorkshire & The Humber
North West £116,000 /Key
£156,000/Key 2019 Uplift: +7%
2018 Uplift: +8%
East Midlands UK OVERSEAS OVERSEAS OVERSEAS UK UK
P R I VAT E H N W F A M I LY
£117,000 /Key INSTITUTIONAL INSTITUTIONAL C O R P O R AT E C O R P O R AT E C O R P O R AT E C O R P O R AT E
EQUITY OFFICE
2019 Uplift: +41% INVESTOR INVESTOR HOTELIER INVESTOR HOTELIER INVESTOR
West Midlands
£106,000/Key
East of England
2019 Uplift: +2%
£203,000 /Key
I N VESTOR 2 01 9
2019 Uplift: +60% APG Asset
L EA DI NG Vivion Adventurous
Queensgate M&G Real Management & DTGO London & The Ability
Wales Investments / Journeys
London* Investments Estate London Central Corporation Regional Group
£50,000/Key Dayan Family Capital Partners
£410,000 /Key Portfolio
2019 Uplift: -49%
2019 Uplift: +28%
South East
I N VEST M EN T
South West
£163,000 /Key
£144,000/Key
TOTA L
2019 Uplift: +46%
2019 Uplift: +26% £1 Billion £485 Million £525 Million £125 Million Confidential £450 Million £60 Million £58 Million
Source: Knight Frank Research. * Excludes development transactions
Source: Knight Frank Research
16 17
Scotland Prime 79% Scotland Prime 37%
£110,000 /Key 2019 £110,000 /Key 2019
UPLIFT
UPLIFT
U K H O T E L C A P I TA L M A R K E T S 2 0 2 0 U K H O T E L C A P I TA L M A R K E T S 2 0 2 0
uu
STRONG SURGE IN GROUND and it is therefore unlikely to become
functionally obsolete in the short-to-
ground lease transactions, which
occurred simultaneous to Queensgate
Commercial ground rents
are now a well-established
LEASE INVESTMENTS medium term, with the tenant held
accountable for the maintenance of
Investments’ acquisition of four Grange
hotel assets. Aviva Investors acquired
asset class for investors and an
attractive funding source for
the property. the freehold of the Grange Tower Bridge, owners of hotels. We envisage a
whilst Alpha Real Capital acquired the strong pipeline of transactions
A prominent trend in UK hotel investment during 2019 involved a striking In 2019, a total of 13 ground lease
ground rents of the three remaining entering due diligence, with
increase in the number of hotels involved in ground lease transactions, transactions were executed, involving
hotels, all of which have since rebranded the greatest flexibility offered
rising by more than 3.5 times compared to the previous year. some 57 hotel assets. Institutional
under the Leonardo and NYX brands, to tenants with the strongest
investors totally dominated the
following the Israeli-based Fattal Hotel covenants. Investors need to
ground rent market, with a 99%
Group acquiring the long-leasehold have confidence in the long term
share of the total investment, whilst
interest of all four properties. income generating capabilities
T ransaction volume of approximately
£800 million was recorded in 2019
in long-lease hotel real estate (which
are effectively capital raising vehicles
increased popularity of this investment
structure, and hotels are particularly
ground rent transactions accounted
for 32% share of total institutional Overall, across the UK market, the
and value of the asset.
which represented a 13% share of total UK for the seller of the freehold), are well suited to this form of investment, investment. The volume of ground net initial yield for a ground lease SHAUN ROY, HEAD OF HOTELS,
hotel transaction volume. increasingly taking the form of income given that rental income tracks inflation, lease deals was elevated to new heights transaction averaged 2.6%, with certain KNIGHT FRANK
strip and ground rent deals. Growing making such deals attractive to an in 2019 as a result of two separate deals reflecting a NIY as low as 2.0%.
In the past, whilst sale-and-lease back uu
awareness of ground rents and their investor’s liability-matching strategy.
deals have proved a successful form of
attractive characteristics has led to
financing, today structures for investing The level of ground rent transactions
which completed in 2019 is proof that
there is a much wider pool of buyers GROUND LEASE TRANSACTIONS 2019
willing to invest in these structures.
Ground rents are usually acquired PRICE
D AT E TENURE PROPERTY CITY PRICE (£) ROOMS NIY% PURCHASER
through private transactions, but with PER ROOM
robust portfolio activity from private
Jan-19 Freehold Holiday Inn Cardiff Cardiff 3,700,000 95 38,000 2.7% CBRE Global Investors
equity investors and corporate hoteliers,
Aberdeen Standard
there has been significantly more scope Jan-19 Freehold Crewe Hall, Crewe Crewe 7,000,000 117 60,000 2.5%
Investment
for institutional investors to carve out
Long Aberdeen Standard
such structures. Feb-19 Q Hotel, Slaley Hall Hexham 5,000,000 141 36,000 2.5%
Leasehold Investment
Ground rent transactions typically Leonardo Royal City &
Apr-19 Freehold London Confidential 947 – 2.0% Alpha Real Capital
offer the longest dated structure, with St Paul's & NYX Holborn
lease terms ranging between 100 years Leonardo Royal Hotel
Apr-19 Freehold London Confidential 370 – 2.0% Aviva Investors
and 999 years. Cash flow constitutes London Tower Bridge
the majority of the return due to the Aberdeen Standard
May-19 Freehold Oulton Hall Hotel Leeds 12,100,000 152 80,000 2.6%
extremely long investment horizon. Investment
A key issue for the investor is therefore, La Salle Investment
May-19 Freehold Village Hotel Walsall Walsall 8,600,000 125 69,000 2.5%
the need to ensure the continuity of Management
income. From both a tenant and an De Vere Beaumont
Jun-19 Freehold Windsor 38,100,000 429 89,000 3.2% Alpha Real Capital
investor’s perspective, it is important Estate
that the rent is set at a sustainable Tides Reach Hotel, Aviva Investors
Sep-19 Freehold Salcombe 5,300,000 67 80,000 2.8%
level and that it remains affordable Salcombe Real Estate
throughout the lease. For an investor, BBC Pension Fund
Holiday Inn Piccadilly,
insuring against the risk of the rent flow Oct-19 Freehold Manchester 28,900,000 298 97,000 N/A Ltd / CBRE Global
Manchester
Investors
being interrupted is as important as
insuring the underlying real estate asset Days Inn by Central Bedfordshire
Oct-19 Freehold Sandy 2,800,000 57 50,000 N/A
Wyndham Sandy Council
itself. One of the greatest attractions
of this structure to the investor, is London & Regional
Dec-19 Freehold Various Confidential 5,972 – 3.5% M&G Real Estate
43 Hotel Portfolio
that the condition of the real estate is
The Grange Hotel, Tower Bridge – Knight Frank advised Aviva Investors on the acquisition of the ground rent. critical to the operation of the business Source: Knight Frank Research
18 19U K H O T E L C A P I TA L M A R K E T S 2 0 2 0 U K H O T E L C A P I TA L M A R K E T S 2 0 2 0
INNOVATIVE FUNDING OF
for mitigating the development investor, while subleasing the building funding of vital services, in a climate
risk. However, a key objective of an at a profit, to a hotel operator. The deal of increasing reducing resources.
HOTEL DEVELOPMENTS
institutional investor is to de-risk the provides a mechanism to ensure that the However, local authorities themselves
investment from the outset, thereby freehold title transfers to the authority need to undertake sound due diligence
creating stable, low-risk, long-term for a nominal value at the expiry of lease, to ensure commercial terms are in their
returns to match future liabilities. As typically a buy back option in favour best interest. In 2019, direct investment
such, increasingly innovative forward of the tenant or to enter into another by local councils totalled around £55
As outlined in our latest UK Hotel Development Opportunities
funding structures in the form of income strip agreement. million, with all deals involving a high
publication, the positive momentum and record amounts of
income strips are becoming more quality tenant such as Travelodge.
development capital targeting the UK hotel sector has translated
prominent in the structuring of a
into a strong pipeline of hotel development coming to fruition. However, indirect investment, via
development transaction. uu
income strip deals are likely to continue
In 2019, development to evolve, similar to the £150 million
The weight of local authority funding represented acquisition by Aviva Investors for The
covenants help fund hotel 35% of total institutional Gate development in London Aldgate,
developments investment into where the London Borough of Barking
O ur latest research reveals
approximately 15,000 new hotel
funds, opportunity funds, traditional
banks, challenger and international
impact on the changing shape and size
of the UK hotel sector, accounting for
Local authorities and other public
the UK hotel sector, with
this figure rising to 46%
& Dagenham entered into an out-of-
borough 50-year lease agreement,
institutions are increasingly being
rooms opened in 2019, with UK hotel banks, private equity and private wealth 85% of the transaction volume. In 2019, in London. featuring an apart-hotel with 189 suites.
sought after to act as intermediary
supply growing by 2.2%. Whilst the funds, family offices, mezzanine lenders, development funding represented 35% Set-up costs and stamp duty, incurred
tenants, entering into a 30 to 50 year uu
continuing dominance of the branded offshore capital and many more. of total institutional investment into by the council, are to be funded by the
lease agreement with an institutional
budget sector continues, a plethora of the UK hotel sector, with this figure institutional investor, up to a pre-
Our research reveals a total of 35 hotel investor. In doing so, local authorities,
new hotel openings from an extended rising to 43% in London, an indication agreed amount.
development transactions took place in with their strong tenant covenant, Local authorities are increasingly turning
range of brands is further driving of the insatiable demand to add value
the UK during 2019, in the form of the provide a guaranteed income stream to hotel investment as a means to boost
development activity. through development.
acquisition of hotel sites or innovative (similar to a bond) to the institutional their financial strength to support the
Whilst scarcity of existing hotels coming structures geared towards the forward Development projects are complex and
to the market has almost certainly steered funding of hotel projects. Development detailed in nature, thus balancing the
some investors towards investing in hotel competing levels of interest between Fig 13: Income strip
transactions totalled over £1 billion of
Fig 12: Income strip
development, the underlying growth investment, with 57% of the transaction an investor and the developer is
in hotel development has stemmed critical. Undertaking a high level of due SITE SALE 50-YEAR HEAD LEASE FIXED RENT SET AT LEVEL
volume targeting London sites.
TRANSFER FIXED RENT INDEX FOR LOCAL AUTHORITY TO
from the prolific sources of capital diligence from the outset and building OF FREEHOLD LINKED TO RPI OR CPI RECEIVE A PROFIT RENT
subject to cap and collar linked to RPI or CPI subject to cap and collar
now available, in terms of both debt Institutional investors have been long-lasting, trusted and seamless
and equity financing. These channels instrumental in the provision of funds relationships with experienced partners
include: insurance companies, pension and are having a profound positive with a credible track record, is critical
LOCAL
DEVELOPER AUTHORITY
(INTERMEDIARY TENANT)
HOTEL
PURCHASER
(INSTITUTIONAL INVESTOR) O P E R AT O R
(OCCUPATIONAL TENANT)
Liability for repair
Developer agrees to sell the & maintenance
25-30 year sub lease
completed development to a transferred to tenant
with options to extend
purchaser. The agreement is to end of head lease
secured at an early stage, most Strong tenant covenant, provides Liability for repair &
likely pre or during planning guaranteed secure income to maintenance transferred
institutional investor to operator
Amortising nature of the asset – the economic
value of the head lease for the institutional investor
expires gradually over the term of the lease.
Clayton Hotel Bristol, acquired by Aberdeen Standard Investment, NIY 4.25% Knight Frank advised the seller.
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