Institutions increase exposure to UK hotels by over a quarter

The UK hotel market defied expectations and saw investment volumes reach £6 billion in 2019, attracting a significant 26% uplift in investment by institutional investors, according to the latest UK Hotel Capital Markets: Investment Review 2020 report by leading global property adviser Knight Frank.

Following an exceptional level of portfolio activity in 2018, last year saw hotel transaction volumes slow by £1.2 billion. This represents a 3% decline compared to the 5-year average owing to lower investment activity linked to Brexit-related uncertainty and a turbulent political landscape, but remains 5% above volumes in 2017.

Total institutional investment (both UK and overseas) into the UK hotel market totalled £2.5 billion in 2019, increasing by over a quarter and accounting for 41% of total UK hotel investment. This came as UK institutional investors more than doubled their investment into the sector totalling over £2 billion.

Whilst investment into mainstream asset classes experienced steep declines in 2019, the weight of capital invested into alternative property during 2019 increased by 4.8% year-on-year, as investors are attracted by long-dated income to diversify their portfolios, combined with the awareness of the growing demand for experiential travel and location-based experiences, which are further driving investment in the sector.

Knight Frank remains cautiously optimistic for 2020, anticipating an increase in higher value stock coming on the market, resulting in increased activity from overseas investors, particularly from Thailand, Japan and the Middle East. As such, Knight Frank considers that UK hotel investment volumes have the potential to rise beyond the 3-year average of £6.3 billion.

Shaun Roy, Head of Hotels and Specialist Property Investment at Knight Frank, said: “We have continued to see a strong demand for secure, long-term fixed income assets which has meant that despite uncertainty within the general investment market, investment into the hotel sector has remained strong, particularly driven by institutional investors.

“Both London and the regions continue to offer attractive propositions and returns for global and domestic investors, who recognise the growth prospects available, whilst significant opportunity exists for investors to take advantage of long-lease ground rents deals which continue to evolve and further strengthen the investment market.

“We predict that 2020 will see more portfolios and higher value assets coming to market to capitalise on the growing appetite from UK and overseas institutions.”

London remains attractive to hotel investors, with hotel investment targeting the city reaching £2.7 billion in 2019, whilst its market share of total UK hotel investment increased to 43%. Though this represented a decline of 11% year-on-year, this level of investment is equal to the capital’s 5-year average investment volume and is 10% higher than 2017 volumes.

The total volume of hotel transactions in the UK regions totalled £3.2 billion, a decline of 20% compared to 2018 but equalling the level of investment recorded in 2017. Manchester attracted £500 million of investment, the highest investment volume within the UK regions, recording 18% market share making the North West the UK’s most active region for hotel investment.