UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW                                                                                                                                                                                                                                                                   UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW

EXECUTIVE SUMMARY                                                                                                                                                                       HOTEL YIELDS V OTHER SPECIALIST SECTORS – Q4 2017

                                              environment surrounding a Brexit deal,       overseas investors with over £2.5 billion     capitalisation rates is further proof of the
                                              the unforgivable terrorist attacks and the   of investment. Meanwhile, further shaping     investment appetite, with net initial yields
                                              volume of new supply entering the market.    the market has been the wide availability     currently at their lowest level on record.
                                                                                           and diverse sources of capital providing
                                              A stronger than expected tourism boost,      senior and mezzanine hotel debt finance,      Whilst we continue to see strong interest
                                              driven by the weak pound has resulted        on a flexible basis with the ability to       from overseas buyers who perceive value
                                              in record numbers of overseas visitors       execute large loans. With an increasing       in the sector and have taken advantage                                                                             9.50%
                                                                                                                                                                                                                                                                                                                                           9.00%             9.00%
                                              arriving in the UK, with London in           pool of institutional lenders, we envisage    of the weaker pound, we consider that in                                                                                                           8.00%
                                              particular benefitting from growth in the    the debt market will remain highly            the regional UK market, 2017 is ending                                                             7.50%
                                              long-haul markets. Meanwhile, with the       competitive in the year ahead.                with more caution as buyers are paying                                                                                                                                         6.50%                        6.00%
                                              cost to travel abroad more expensive,                                                      fuller prices. The continued uncertainty                                                                                                                                                  5.50%
                                                                                                                                                                                                                                                    4.75%                                                       4.75%
JULIAN EVANS FRICS                            regional UK hotels have profited from        A further trend set to continue into 2018,    over Brexit has been a contributing factor         4.00% 4.00%             4.25%           4.25%                               4.50%
                                                                                                                                                                                                                                                                                    4.00%             4.00%
Head of Healthcare,                           strong demand in the short break and         is the growing demand by institutional        in the pool of potential buyers narrowing
Hotels & Leisure                              staycation markets.                          investors seeking to invest in long-term,     and with buyers becoming more vigilant,
                                                                                           fixed-leased hotel assets, which provide      taking greater time to complete their due
                                              This year has seen a substantial             secure, index-linked cashflows, backed by     diligence. Opportunities are there for
2017 has proven to be another positive        uplift in investment activity, as strong     a strong covenant. The recent acquisition     the taking and looking after a potential
                                                                                                                                                                                              LONDON                  LONDON        REGIONAL UK     REGIONAL UK         STUDENT        CARE         SURGERIES   PRIVATE ACUTE       SPECIALIST        SPECIALIST
year of revenue and profit performance        fundamentals underpinning the sector         by LGIM Real Assets (Legal & General)         purchaser will be instrumental to the deal
                                                                                                                                                                                              HOTELS                   HOTELS         HOTELS           HOTELS       ACCOMMODATION     HOMES          (PRIME)      HOSPITALS        CARE HOMES          SCHOOLS
for hotels in the UK, with GOPPAR             continue to make hotels an attractive        acquiring the newly opened Hampton by         flow in the year ahead.                              (PRIME)               (SECONDARY)       (PRIME)       (SECONDARY)       REGIONAL UK     (PRIME)                      (PRIME)           (PRIME)            (PRIME)
growth driven through advances in the         investment proposition. Key trends for       Hilton at Stansted Airport illustrates the
average room rate. This is a remarkable       2017 have included a strong surge in         current demand in the investment market
achievement and testament of the              portfolio activity, portfolio breakups,      for prime, internationally branded, quality
resilience of the UK hotel market, given      resulting in larger single assets coming     assets with significant growth potential.
the challenging and uncertain trading         to market and significant appetite by        The compression of fixed income

                                                                                                                                                                                                   Fixed income
                                                                                                                                                                                                   Going Concern

                                                                                                                                                                                           SOURCE: Knight Frank Research
UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW                                                                                                  UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW

                                                                                                                   HOTEL TRADING PERFORMANCE
HISTORICAL HOTEL YIELDS (GOING CONCERN) 2007-2017                                                                  ROLLING 12 MONTHS (DECEMBER - NOVEMBER 2016/17)


14.00%                                                                                                                          7.0%             5.3%               6.6%         6.3%


10.00%                                                                                                                          £134             £185               £84          25%



4.00%                                                                                                                         RevPAR            TRevPAR            GOPPAR       Payroll
                                                                                                                                                                               % of total
2.00%                                                                                                                                                                          Revenue

                                                                                                                                                    UK REGIONAL
                        2007     2008   2009     2010   2011   2012   2013   2014   2015   2016   2017   10 YEAR
                                                                                                                               5.1%              3.6%               4.3%         3.3%
         London Prime
         Regional UK Prime
         Regional UK Secondary
                                                                                                                                £65              £112               £36          30%

SOURCE: Knight Frank Research

                                                                                                                              RevPAR            TRevPAR            GOPPAR       Payroll
                                                                                                                                                                               % of total

                                                                                                                             SOURCE: HotStats
UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW                                                                                                                         UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW

KNIGHT FRANK FORECAST 2018                                    HOTEL SUPPLY GROWTH 2017

                                                                                                              LONDON                                                 UK REGIONAL
                                  -0.5%      3.5%    2.9%

                                  81.5%       £173   £141
                                                                                                                                                   C. 489,000



                                                                             C. 150,400
                                OCCUPANCY     ADR    RevPAR                                                                        2017                                                      2017
                                                                                                                                   SUPPLY                                                    SUPPLY
                                                                                                                                   GROWTH                                       2017-2020    GROWTH
                                  0.0%       3.0%    3.0%                                                              2017-2020
                                                                                                                                   +3.1%                                        C. 21,500    +1.7%
                                                                                                                       C. 15,000
                                                                                                                                   PIPELINE                       2017                       PIPELINE
                                                                                                                                   GROWTH                       C. 8,400                     GROWTH
                                  77.5%       £89     £69                                           2017
                                                                                                                                   +3.2%                        ROOMS                        +1.4%
                                                                                                   C. 5,500
UK REGIONAL                                                                                                                        BUDGET                                                    BUDGET
                                                                                                                                   HOTELS                                                    HOTELS
                                                                                                                                   = 60% OF                                                  = 65% OF
                                                                                                                                   NEW SUPPLY                                                NEW SUPPLY
                                                                              EXISTING              NEW                                            EXISTING       NEW
                                                                                                                       PIPELINE    (3,200 ROOMS)                                PIPELINE     (5,400 ROOMS)
                                                                               SUPPLY             OPENINGS                                          SUPPLY      OPENINGS

                                OCCUPANCY     ADR    RevPAR

SOURCE: Knight Frank Research                                            SOURCE: STR, Knight Frank Research
UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW                                                                                                                                                                                                                                                        UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW


                       HOTEL PERFORMANCE                                                             TOURISM                                              TECHNOLOGY                                     CAPITALISATION RATES                                         TRANSACTION VOLUME

Modest growth in key trading performance indicators        Despite major terrorism and security concerns, hotel      Technology will continue to have a substantial impact       Investor appetite in key primary gateway cities will          Despite the uncertainty over Brexit, full year hotel
is expected in 2018, albeit at a slower rate than in       performance is expected to be bolstered by continued      on the UK hotel industry, with the need to invest fast      continue to put pressure on capitalisation rates,             investment of above £5 billion is set to be recorded
2017. Nevertheless, the headwinds of rising costs          strong growth in tourism, with the weak pound             becoming a necessity. Increased competition more            especially where limited pipeline and a resilient trading     in 2017. This represents a 35% rise in investment
in operational expenses, payroll and business rates        continuing to make the UK an attractive destination for   intense cost control pressures, cyber security, more        performance allows for income growth to be built              volume compared to the previous year, with a plethora
highlight the challenges ahead for the industry, at        overseas visitors. A record 27.1m visits was recorded     stringent data protection regulations and social media      into valuations. Fixed income margins are likely to           of investors and a surge in portfolio activity. Overseas
a time of heightened concern with Brexit casting a         for the 8-month period to August 2017, an increase        are some of the major challenges that the industry has      compress further, especially where stock is limited and       investors with long-term aspirations continue to view
shadow over the future of the economy and the free         of 8% on the previous year, combined with 10%             to embrace, combined with the adoption of mobile            long-term, secure income streams are offered with a           London and key regional UK cities as an attractive
movement of labour; consumer confidence softening          growth in spend of £16.4 billion. With strong inbound     technology altering consumer expectations. As such,         strong covenant. Where income growth is impacted as           investment destination. Long dated, secure income
and competition intensifying. Whilst top line indicators   tourism growth set to continue in 2018, combined with     the growing need for hotels to adapt their services to      a result of rising costs, values may soften slightly in the   streams with strong covenants and internationally
are a good measure of hotel performance, a proper and      resilience in the domestic “staycation” market, strong    provide their guests with advanced digital interaction      year ahead.                                                   recognised brands will remain important investment
thorough understanding of the factors impacting upon       tourism demand should provide further growth potential    cannot be ignored. Industry players that embrace                                                                          considerations for the future.
GOP will become far more critical in the year ahead.       for the UK hotel market in the year ahead.                technological change, with the use of customer-centric,
                                                                                                                     next generation technology, through the use of artificial
                                                                                                                     intelligence and Cloud technology are likely to become
                                                                                                                     industry leaders and innovators of the future.
UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW                                                                                                                                                                                                                                                  UK HOTEL & LEISURE PROPERTY 2018 — MARKET OVERVIEW


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HEAD OF HEALTHCARE,                           RESEARCH                                          HOTEL                                                                                 HOTEL AGENCY
HOTELS & LEISURE                                                                                VALUATIONS                                                                            & DEVELOPMENT                                                                       KNIGHT FRANK FINANCE

                                                           PHILIPPA GOLDSTEIN                                 IAN ELLIOTT, MRICS                   ALEX BRADBEER, MRICS                        ALEX STURGESS, MRICS                  ALEX MACAULAY                                   LISA ATTENBOROUGH
              JULIAN EVANS, FRICS                          Hotel Analyst                                      Partner, Head of Hotel Valuations    Senior Surveyor                             Partner, Head of Hotel Agency         Graduate                                        Partner
              +44 20 7861 1147                             +44 20 3826 0600                                   +44 20 7861 1082                     +44 20 7861 1442                            +44 20 7861 1164                      +44 20 3826 0690                                +44 20 3909 6846

              ALYSSIA CLARE                                                                                   JESSICA HIND                         MIKE KELSEY                                 HENRY JACKSON, MRICS                  GEORGINA MCCULLOCH
              PA to Julian Evans                                                                              Office Manager                       Associate                                   Partner, Hotel Agency – Regional UK   Team Secretary
              +44 20 7862 2253                                                                                +44 20 3909 6827                     +44 20 7861 1081                            +44 20 7861 1085                      +44 20 7861 5262

                                                                                                              KAREN CALLAHAN, MRICS                LILIANA IELACQUA, MRICS                     TOM OAKDEN, MRICS
                                                                                                              Partner                              Associate                                   Partner
                                                                                                              +44 20 7861 1086                     +44 20 7861 1084                            +44 20 3826 0607

                                                                                                              JONATHAN CRITCHLEY, MRICS            HECTOR AHERN                                KIT ABRAM, MRICS
                                                                                                              Partner                              Graduate                                    Surveyor
                                                                                                              +44 20 7861 5172                     +44 20 3826 0600                            +44 20 7861 1249
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