Hotel investment volumes improve in H1 2021, with a relatively strong outlook for the remainder of the year
UK hotel investment volumes reached £1.70 billion in the first half of 2021, across 59 deals. While this continues to be below the pre-pandemic five year average of £2.43 billion for the same period, it does represent an increase of 135.2% compared to the previous six month period (July–December 2020), emphasising the green shoots that we’re beginning to see in terms of the UK hotel investment landscape.
Regional UK assets accounted for 56.9% of investment volumes, with Blackstone’s acquisition of Bourne Leisure accountable for a large portion of H1 2021 volumes. In deal count terms, regional assets accounted for a 78% share of transactions in the first half of the year, underlining the ongoing confidence in the recovery of the staycation segment.
Appetite for London assets remains strong, with ongoing investor appetite for quality prime trophy assets as investors remain positive about a return to international travel over the short to medium term. Total investment volumes in the capital reached £732.1 million in the first half of 2021, down -46% compared to the historic five-year average.
While H1 2021 investment may still be relatively subdued compared to pre-pandemic levels, the outlook for the remainder of the year is particularly promising.
Not only is there a great deal of capital raised and ready to be deployed into the market, but there’s also a handful of notable deals under exclusivity and expected to complete during Q3. As a result, we are currently forecasting year-end hotel investment volumes to exceed 2020 levels by over 67% (see below chart) equating to only an 11.2% variance on the 15-year average, demonstrating the robustness of the sector.
Encouragingly, this covers a range of both city centre trophy product as well as key regional assets, portfolios and recapitalisations pointing to ongoing investor confidence across the sector as a whole, and in spite of current international travel restrictions.
Hotel financing continues to delay completions albeit encouraging signs are emerging
From a financing point of view, hotels clearly remain a real estate sub-sector that is still under heavy scrutiny in terms of existing exposures as well as the impact of the slow unwinding of various government support programs.
Traditional bank lenders remain extremely cautious and relatively inactive in new financings for hotels, albeit we are starting to see a few re-emerge into the new lending space. They continue to monitor their exposures in the hospitality industry with existing clients and are infrequently willing to consider new business in the sector. In regards to a refinancing of existing facilities with traditional lenders, or indeed an acquisition, a number of transactions have taken place at a lower effective gearing level together with higher pricing, resulting in an improved overall risk-return for the lender.
However, there has been a noticeable increase in activity and resulting appetite for certain hotel assets from the non-bank lenders who are able to offer higher gearing levels (70%+) in return for increased returns. These lenders have considerable firepower and are actively looking for further opportunities.
Where transactions are occurring often the lenders are seeking credit mitigation by way of interest of reserve or guarantees of between 12 and 24 months to support the approval of new facilities. Some lenders may seek additional collateral if available to bring them to the table.
Andrew McMurdo, Head of Savills Debt Advisory, adds “Despite some ongoing headwinds in terms of existing exposures, what’s promising is the growth in activity and confidence from non-bank lenders within the hotel sector. Clearly there is a current bias towards leisure hotels and away from pure business hotels due to the expected pace of their occupancy recovery in the near term, and the continuation of the staycation impact. However, increased transactional activity in urban centres is starting to change this landscape.”
Sustainability high on the agenda for both financing and investment opportunities
In terms of financing new commercial developments, green loans are becoming much more commonplace, as asset managers, developers and investors move towards their individual sustainability targets.
Most notably within the hotel sector, Qatari Diar recently secured a £450 million green loan from HSBC and Credit Suisse (amongst others) for the construction of its luxury hotel complex, The Chancery Rosewood, in London’s Grosvenor Square.
In addition, there are multiple government-backed regulations that investment companies now have to begin adhering to. For instance, the UK government has set out a roadmap towards the compulsory sharing of climate-related information, through the development of the Taskforce on Climate-related Financial Disclosures (TCFD), intended to promote companies to disclose ESG-related risks and opportunities across their investments.
With effect from March 2021, the introduction of the Sustainable Finance Disclosure Regulation (SFDR) by the European Commission will also initiate the compulsory disclosure of any ESG-related risks and impacts. This will increase the transparency of future acquisitions and is therefore likely to generate further promotion of sustainable investing.
Lizzie Jones, Head of CSR at Savills, comments “As more government-back regulations take effect in regards to investing into sustainable products, investors’ transactions will be put under increased scrutiny. There is, therefore, an enhanced obligation for hotel investors. In addition, this is a very consumer-focused sector, with travellers becoming increasingly conscious about the impact of their travel habits. As a result, we can expect further investor attention to turn towards sustainably-led hotel assets or new developments going forward”.
While investing into greener assets isn’t a new phenomenon within the hotel sector, it’s definitely increasing in demand. One such example includes London’s original ‘eco-hotel’ and Green Tourism Gold awarded Zetter Hotel, which was sold as part of the Zetter portfolio to hospitality investor Orca Holdings in March 2021.
As investors demand more in terms of sustainability, this increases pressure for operators to move quicker towards their net-zero targets – not only providing benefits from a valuation perspective but also through potentially reducing unsustainable overheads.
As clarity is key between operators and investors, we’re witnessing an increase in sustainability audits, accreditation as well as more triple-bottom-line accounting across the sector to improve the transparency of operators’ practices from an ESG-perspective.