UK Hotel Investment - Savills
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UK Commercial – 2019
S P OT L I G H T
Savills Research
UK Hotel Investment
Transaction volumes top £6.6bn Portfolio deals dominate Robust operational performance
UK Hotel Investment Report 2019
Resilience in the face of
Transaction volumes and prime yield Year-end 2018 volumes topped
2017 totals and exceeded the 15-year average by 59%. This continued investor
Brexit is the key feature of
appetite has resulted in the marginal hardening of yields.
the UK hotel market as we
head into 2019.
Transaction volumes London vols
Fixed lease (strong cov)
Rest of UK vols
Fixed lease (unproven cov)
UK vols 15yr ave
Franchise
increased 25.2% to total Turnover leases
£6.6bn in 2018 supported by £10,000 9.0
continued overseas investor £9,000 8.5
appetite. This is likely to 8.0
£8,000
continue over 2019, 7.5
particularly for its tourist £7,000
7.0
markets, as whether the UK
Volume £m
£6,000
Yields (%)
6.5
is in the EU or not will do little £5,000 6.0
to dent its appeal to 5.5
£4,000
international tourists. 5.0
Structural shifts in consumer £3,000
4.5
spending, with a shift £2,000
4.0
towards ‘experience’ £1,000 3.5
activities such as holidays,
£0 3.0
will also support demand 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
and in turn operational
Source Savills Research
performance in the face of
rising supply. However, going
forward, we may see these
shifts shape guest
Hotel investment volumes grow
preferences when it comes
to branding and type of
offer.
This year we will also see Overseas investors continued to dominate transaction activity in
more investors move up the 2018, driven by a number of large portfolio deals.
risk curve in 2019 on the hunt
for higher yielding 2018 was a particularly buoyant portfolios. These included Israeli Institutions. Leased assets,
opportunities. As a result we year in terms of transaction investors Vivion Capital Partners particularly those with strong
are likely to see a more activity with volumes totalling acquiring the 20-asset Holiday covenants and typically favoured
diverse range of buyers in £6.6bn, exceeding the 2017 total Inn and Crowne Plaza portfolio by this buyer group, have seen
the management contract by 25.2%. from Apollo Global Management significant yield compression over
space and in the less mature Much of this growth was driven for £742m, with French investors, the last five years with indicative
subsectors such as serviced by an increase in portfolio deals Covivio, acquiring the Principle prime yields now in the region of
apartments and hostels. which totalled £3.5bn, 2.3 times the Hayley portfolio for a reported 3.50-4.00%.
An increasing number of 2017 total and representing 53.3% £847m. The hunt for higher yielding
retail to hotel conversions will of total volumes. This was the Investor appetite is set to assets has already resulted in a
also emerge this year. While third consecutive year of volume remain in 2019 with overseas growing interest in leased assets
this is in response to the growth. buyers continuing to dominate. with weaker covenants. This has
structural shifts in retailing, Despite the Brexit uncertainty However, with fewer portfolios now shifted into the management
which is driving retail overseas investors continued to likely to come to the market we contract space helped by the fact
vacancy, these conversions be the most active, in particular may see a slight softening in that prime indicative yields are in
those from Europe and Middle volume terms with deal count the region of 150bps higher than
have the potential to provide
East, highlighting their continued holding. those leased on strong covenants.
a sense of place, supporting
confidence in the UK hotel L&G, for example, bought the
the retail that remains.
market. Acquisitions by this group UK institutions looking to Hampton by Hilton Stansted
While the sector drivers
reached £3.4bn in 2018, 22.5% up management contracts in Airport hotel in October 2017, with
remain robust, margin on 2017 and the second highest the pursuit of higher yields Blackrock acquiring the Hilton
challenges will continue this annual figure after the 2015 peak An emerging trend has been Garden Inn Birmingham Airport
year. The real change from of £4.3bn. Almost 70% of this the acquisition of hotels on in September 2018.
2018 will be its influence on 2018 total was accounted for by management contracts by UK
investor preferences, to the
benefit of operators and
subsectors that enjoy Overseas investors have contributed to the lion’s share
higher margins. of portfolio transactions in 2018, totalling £2.4bn.
savills.com/research 2UK Hotel Investment Report 2019
25.2%
25.2% Increase in total UK
transaction volumes
in 2018.
The size of the management The return of the regions assets within the SACO portfolio Average value
contract space (in terms of deal London is, understandably, the acquired by Brookfield, the most per key
count) is relatively constrained, largest city market in the UK with substantial serviced apartment
representing only 6.5% of transaction volumes of £2.7bn deal in the UK to date).
transactions in 2018. Whereas, in 2018, exceeding the previous This diversification partly
leased transactions accounted 2013 peak by 10.2%. However, reflects the increased availability
for a 24.2% share of transactions its share of the wider UK market of stock within these sectors,
over the same period. With a has been softening over the for example 51% of new stock
broadening buyer pool however, last 5 years due to pricing and delivered over the last 10 years
this share will increase improving availability constraints. Regional has been budget. In the case of
the range of opportunities volume share was 59.3% in 2018, the budget sector, it has also been
available for investors. 3.7% above the 15 year average. supported by strong investor £350,513
The appeal of management While a significant share of this is appetite for leased assets that are London 2018
average value per key
contract acquisitions is not attributed to portfolio deals, we more prevalent in this segment.
just confined to pricing, the have also seen significant growth This trend may also reflect an
ability to benefit from strong in single asset acquisitions across emerging investor preference for
operational performance and a number of regional cities. leaner business models in the face
asset management is an added of mounting margin pressures.
attraction. But, it does mean more Investor shift towards The big issue for hoteliers over
exposure to operational risk, costs leaner business models the last 18 months was shrinking
and increased complexities due to This diversification is not just a margins due to rising costs, largely
employee liability. geographical trend. Acquisitions in response to the introduction
Despite these relative risks across grade and subsector has of the living wage in 2016, and
we expect UK Institutions also improved. In 2007 the in London the Business Rates
will look to take on additional market was dominated by four revaluation that came into effect £104,047
operational risk in 2019. Yet, it and five-star transactions. Last in April 2017. Going forward Regional UK 2018
average value per key
will require much greater deal year, while four-star accounted these margin pressures are likely
scrutiny in terms of the asset for a sizeable 32%, budget hotels to intensify in response to staff
itself, cashflow and local market represented 28.1%, up from 11.2% availability constraints after the
dynamics. More importantly it
will require working with credible
in 2007, and serviced apartments
12% of transaction volumes (albeit
UK exits the EU.
As noted in our 2018 report, 59.3%
operational partners. this was largely determined by the potential halt of free Share of total
the £360m attributed to UK movement into the UK could UK investment
volumes
attributed to
regional hotels
in 2018.
Hotel investment volumes by grade Budget hotels and serviced apartments
have considerably increased their market share of investment volumes.
Budget 2* 3* 4* 5* Apartments Hostel
11% 12%
23% 26%
28%
22%
11% 13%
2007 2018
2017
6%
13%
32%
51% 41%
Source Savills Research *Note - excludes mixed grade portfolio transactions
3UK Hotel Investment Report 2019
Hotel yield spread to Government Bonds Stock market uncertainty has placed
downward pressure on Bond yields, widening the risk free rate to hotels.
Yield spread (20yr Bonds vs MSCI Hotel Yield basis points) Yield spread (15yr LT ave) MSCI UK Hotel Yield (EY) 20yr UK Gov Bond
450 9.0
8.5
400 8.0
7.5
350
7.0
6.5
Yield spread bps
300
6.0
Yields (%)
250 5.5
5.0
200 4.5
4.0
150 3.5
3.0
100
2.5
50 2.0
1.5
0 1.0
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Source Savills Research; MSCI; BoE
reduce access to labour for a apartment, budget and hostel to a strong run in the equities
sector where 34.1% of staff are subsectors as they tend to market. However, stock market
EU nationals (BHA 2017 survey). enjoy higher margins. Serviced uncertainty towards the latter end
Staffing constraints are already apartments, for example, typically of 2018 has seen a ‘flight’ to more
apparent in vacancy with the latest operate with margins of 50-70% secure assets such as Government
data from ONS (November 2018) as opposed to an equivalent hotel Bonds and Gold, with Bond yields
pointing to a 4.1% vacancy rate which can be between 10-20% now under downward pressure
in the accommodation and food lower. as a result. A trend that is set to
services sector, the highest of any continue going into 2019 due to
subsector classified by ONS, and Could recent stock market slowing global growth.
exceeding the all sector average uncertainty further support This recent compression has
of 2.8%. This is now starting current pricing? marginally opened up the yield
to feed into wage costs, placing 2018 saw yield hardening in some spread to UK hotels, which
further pressure on margins. For parts of the market with Prime remains above the long term
example, CV-Library revealed that indicative yields for leased assets average of 275 basis points (bps).
advertised salaries for jobs in the on unproven covenants and those While this increasing spread will
hospitality sector grew 7.1% over on turnover leases hardening help to support current pricing,
2018, the second highest of any by 25 basis points (bps), driven rising investor appetite for ‘income
sector. by growing investor appetite for security’ in the face of slowing
higher yielding assets. Prime Global growth and volatility in
Shift towards leaner indicative yields for institutional the equities market could enhance
business models leased assets on strong covenants, the appeal of property as part
Margin pressures have already led which are the lowest, continued of a wider portfolio strategy in
operators to improve efficiencies to hold at their 2017 level last 2019. With hotels enjoying strong
across their businesses. We expect year. On certain selective deals, demand fundamentals it is likely
it will also lead to greater investor however, there have been some to benefit from increased property
focus on those parts of the market, record yields recorded. allocations, potentially leading to
and operators, that can deliver Downward pressure on prime further yield hardening in some
enhanced margins particularly yields across the board largely parts of the market.
where assets are being purchased dissipated over the second half of
on management contracts. 2018. Some of this was in response
This will further support to rising Bond yields, shrinking
investment into the serviced the spread to property yields, due
savills.com/research 4UK Hotel Investment Report 2019
2% 1.3%
UK hotel average annual stock
growth over preceding five
years against the 1.3% forecast
through to end of 2023.
Resilience in the face of Brexit
BALANCING
LOCAL AND
How well placed is the UK hotel market to weather any potential VISITOR NEED
Brexit related headwinds? The growth in overseas
visitor arrivals has
UK Real Estate has been facing a number of will be delivered across the UK in 2019 on the back of brought about
challenges of late largely focused around Brexit and the 15,000 delivered in 2018. By December 2023 this challenges in terms of
structural shifts in regards to consumer behaviour will total an additional 46,400 new rooms. While managing both the
and use of technology. For some sectors, such as this is sizeable, in growth terms it averages only 1.3% needs of local residents
logistics, this has thrown up opportunities. For hotels per annum, lagging the historical five year average of and tourists.
the positive implications of some of these shifts have 2.0%. This is a key concern
been somewhat under the radar. This national picture, however, does mask for a number of
Whether the UK is in the EU or not will have significant pipeline variations across regional cities European tourist
little bearing on its appeal as a tourist destination, and grades. gateway cities, with
highlighted by the boost in tourist arrivals due to the London accounts for 32.1% of total new rooms many implementing
weakening in the Pound immediately after the EU forecast to be delivered by the close of 2023 hotel development and
Referendum result. This tourist appeal is expected to (approximately 14,900 new rooms). While there may Airbnb controls to help
continue beyond the UK exiting the EU in March 2019 be some very localised and subsector absorption mitigate the issue.
with international arrivals forecast to increase 12.7% risks, we expect that where these do materialise they Barcelona, for example,
to 44.2 million by 2030. This will support operational will be short-lived. This is reflected in the continued has effectively banned
performance, particularly in those key gateways cities RevPAR growth reported in 2018 (year-end growth any future hotel
that attract significant numbers of international of 2.4% year-on-year) in the face of a 3.3% growth in development within
tourists. For example, London is forecast to see a stock, highlighting that overall demand continues to the city centre as
12.5% growth in arrivals to 22.3 million by 2030. outpace supply. well as curbing Airbnb
However, this expansion is likely to throw up It is in those regional cities set to see a significant supply.
regulatory challenges in terms of maintaining a increase in four-star supply that may be more In London, we are
sustainable balance between local resident and visitor exposed over the short term particularly in the face starting to see similar
need (see opposite). of softening corporate demand in response to the UK policies put in place.
actually leaving the EU. In these cases resilience will From a development
Changing consumer behaviour also be determined by the specifics of location, operator perspective some inner
set to support demand expertise and product differentiation. boroughs are refusing
Changing consumer preferences for ‘experiences’, planning consent for
such as travel, will also support operational Retail to hotel development hotels on the grounds of
performance, driven both by international and opportunities emerge maintaining local
domestic visitors. The well documented challenges facing UK retailing resident amenities.
UK households have increased spend on holiday is generating redevelopment and intensification Westminster City
accommodation abroad by 29.9% in real terms since opportunities both in-town and out-of-town, as retail Council (WCC) has taken
2009, with a similar trend seen across a number of vacancies increase and planning regulations relax. this a step further with
European countries. This shift in spend is more For example, planning consent was secured for the their new City Plan that
marked when you consider that total household redevelopment of vacant retail and office space at may require all new
expenditure has declined 5.8% over the same period. Chester’s Grosvenor Shopping Centre into a 94 room hotel developments
Likewise, spend on ‘staycation’ accommodation in the Premier Inn in 2018 with a similar scheme secured for (including extensions)
UK has grown by 52.4% in real terms since 2009. the former BHS store on Princes Street, Edinburgh. within Westminster’s
Those consumers driving this growth are the Apart from the obvious conversion benefits hotels Central Activity Zone to
under 30’s and over 50’s. With millennials and Gen-Z can add value and a sense of ‘place’ to the remaining ensure at least 35% of
consumers (largely those under 30) placing more retail and town centre offer. Firstly, hotel guests floorspace is allocated
onus on ‘experiences’, this is a trend that is likely to can provide additional footfall. Secondly, integrated to on-site affordable
pick up pace over the coming years. hotel amenities such as gyms, bars, restaurants, event housing. This will likely
While there are a number of attractive operational space and co-working, not only for the use of hotel challenge viability, in
drivers for UK hotels going forward, the sector does guests but also local residents and day visitors, can some cases, within the
have its own unique headwinds that may be apparent also provide an additional draw and vibrancy further zone. It does mean
at a submarket and geographical level. These include enhancing footfall. however, values and
the development pipeline, softening corporate operational performance
demand and shifting guest preferences when it comes of existing properties
to branding and type of offer. will be more immune
from future
Hotel stock due to grow 1.3% per annum London is expected to see levels development. It may
through to 2023 of overseas arrivals grow by also open up new
From an operational perspective, one of key concerns opportunities in
is the volume of new stock coming to the market in 12.5% between 2017 and 2030, surrounding areas and
2019. According to STR, close to 23,000 new rooms to reach 22.3m. other boroughs.
5Savills Commercial Research
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Hotels
George Nicholas Tim Stoyle Rob Stapleton Richard Dawes James Bradley
Global Head of Hotels Head of UK Hotels Hotel Agency Hotel Agency Hotel Valuations
+44(0)20 7409 9904 +44(0)20 7409 8842 +44(0)20 7409 8029 +44(0)20 7409 8106 +44(0)20 7409 8771
gnicholas@savills.com tstoyle@savills.com rstapleton@savills.com rdawes@savills.com jbradley@savills.com
Research
Marie Hickey Josh Arnold
Commercial Research Commercial Research
+44(0)20 3320 8288 +44(0)20 7299 3043
mlhickey@savills.com josh.arnold@savills.com
Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK,
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