Thought of the Week
Portfolio deals boosting investment in the hotels sector
August 8, 2024 4 Minute Read
The outlook for hotels is optimistic, according to our European Hotel Investor Intentions Survey, over 90% of respondents expect to maintain or increase their hotel investments in 2024. We have seen a marked uptick in hotel investment volumes in the first half of the year, which has largely been driven by the stabilisation of interest rates and resilient trading performance. Private equity firms, in particular, have been targeting European hotels, and the amount of dry powder looking for a home suggests that momentum for the hotel sector will continue throughout 2024 and into 2025.
The UK consistently attracts global capital, and this has driven strong investment so far this year with the UK accounting for 34% of total hotel investment volumes in Europe. Over £1.5bn has been invested in the London hotels sector, and a further £1.6bn invested in the regions, spurred by Starwood’s acquisition of a 10-hotel (over 2,000 London keys) portfolio from the Edwardian Group and Blackstone’s purchase of Village Hotels (4,400 keys across the UK). The bid-ask spread for hotel transactions has been narrowing due to a combination of seller pragmatism, lender appetite and optimism in the demand-supply conditions, leading to an uptick in deal activity.
The UK’s hotel investment volumes have already surpassed the entire year of 2023, with over €3.67bn (£3.15bn) in transactions thus far this year. Portfolio deals have been driving investment volumes, accounting for 70% of YTD volumes. There is over £900m worth of deals under offer and expected to close this year. We therefore forecast that year-end 2024 volumes will exceed £5bn, reflecting significant transactions in the pipeline.
Several other factors contribute to this uptrend:
- Growth potential in key markets: The UK, together with other key tourism destinations is set to benefit from sustained growth in international overnight visits. Data shows that it has already exceeded 2019 levels this year, and the increase in tourism to London will further cement its position as the top city for overnight visits.
- Return of Chinese tourists: Chinese tourists are gradually returning, with a full recovery expected by 2025. This influx could potentially support occupancy rates moving forward.
- Opportunity to add meaningful value: More than half of the respondents to our survey indicated a preference (and expectation) for value-add returns from their investments. This proportion notably exceeds the average seen across other real estate sectors, which hovers around 30%.
Our survey findings also show a clear preference for luxury and upper-upscale hotels. The inclination towards luxury hotels is supported by a better understanding of that segment post-pandemic, including its ability to price well ahead of inflation, attracting a new category of buyers to that segment. Investors recognise the benefits of this hedging attribute.
Overall, the findings give us confidence that the strength in leisure demand will continue to attract buyers to hotels in popular tourism and resort locations. Investors now recognise the long-term demand fundamentals of Europe’s gateway cities, with a majority viewing them as attractive investment prospects.
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