It has been another huge year for the UK hotel investment market and a booming final quarter looks set to drive total transaction volumes to a record-breaking £8.5 billion before the year is out. This marginally exceeds the previous £8.3 billion peak of 2006 and is no less than 39 per cent higher than last year’s £6.1 billion total.

More than £5.7 billion worth of UK hotels have changed hands so far in 2015, with the H1 total 76.8 per cent higher than the same period last year at £3.5 billion. High-profile portfolio sales such as the LRG2 portfolio of Holiday Inn hotels (£225 million) have played a key role in this. We expect a further £1.6 billion worth of portfolio sales to complete in the final quarter or early part of 2016, including the £1 billion final tranche of the LRG portfolio of IHG branded hotels.

This increase in activity is exerting downward pressure on yields, with greatest compression seen in the franchised hotel sector where yields now range from 5.5-8.5 per cent, compared with 6.5-10 per cent in 2014.

This year has been all about the regions, with transactions outside London dominating the UK hotels market and accounting for more than 78 per cent of the total. US private equity houses have been behind 65 per cent of hotel acquisitions in the regions (spending in the region of £2.1 billion), with key deals including Lone Star’s acquisition of the Jury’s Inn portfolio for £676 million. While US investors have remained the most acquisitive overseas buyers of regional hotels, this is down on the 90 per cent share they held in 2014.

Availability constraints in London have attracted new overseas buyers to the regions, including Asia Pacific investors who have acquired more than £1 billion worth of regional hotel assets so far this year. Frasers Hospitality’s purchase of the Malmaison and Hotel du Vin portfolio at £363 million is a good example. While there were no country house hotel acquisitions by Asia Pacific investors in 2014, we have already seen five this year.

In terms of UK institutions, hotel investment is increasingly being seen as mainstream, with acquisitions by UK institutions reaching an all time high of £1.2 billion last year. More than 93 per cent of institutionally owned hotels are tenanted by a lessee, which indicates a clear preference for this type of asset.

The biggest barrier to entry for institutional investors is therefore the fact that 80 per cent of UK hotels are owner-occupied or third-party managed. In order to satisfy appetite for hotel investment, UK institutions are looking to new brands and concepts such as serviced apartments. A notable example is LaSalle Investment Management’s £9.6 million purchase of Staycity in Deptford.

Further information

Contact Savills Hotels team.