commercial property lambert smith hampton

Viewpoint - 25/04/2013

UK hotels market 2012 reviewed

2012 was a tough year for the UK economy as a whole.

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GDP grew by just 0.3% and high inflation kept real wage growth low for at least the first half of the year. There was a marked regional divide in economic performance though, so that London and to a lesser extent the South East fared better than the rest of the country.

London RevPAR increases in 2012

The regional divide was reflected in the performance of the hotels market in 2012. In London, despite a drop-off in visitor numbers prior to the start of the Olympics, the boost provided by the increase in numbers during the games and London’s better economic performance meant that average RevPAR increased by 2.2% pa according to the performance benchmarking numbers from STR Global.

Slow down in 2013

However, this good performance is not expected to continue in the same vein in 2013. The delivery of new hotel beds prior to the Olympics means overall supply has increased and at the same time visitor numbers in London are expected to drop-off in 2013. Therefore, STR Global expects RevPAR to fall by 1.6%, although this is at the lower end of the spectrum and some commentators expect a greater level of decline. Although, the weakness of the pound is an upside risk: the pound has performed poorly during the first quarter of the year and if the Bank of England introduces more rounds of quantitative easing later in the year it will continue to do so. This could prompt greater overseas visitor numbers as tourists take advantage of the relative strength of their domestic currencies to visit the UK.

No Olympic boost in regions

Economic conditions outside of London and the South East of England remained tough throughout 2012 and this was reflected in the performance of the regional hotels market. The regional markets saw RevPAR levels drop during the 2008-09 recession and they have failed to return to the pre-recession levels since. There had been speculation that the Olympics would provide a boost some of the host towns and cities outside London; however, any benefits accrued were marginal and it had little impact on overall trading.

Data from STR Global shows a 1.4% decrease in RevPAR in the UK regional hotel market in 2012. They do expect a very modest return to growth in 2013 and increase in RevPAR of just 0.9%, but an oversupply and the modest performance of the UK economy rules out a greater increase.

Investors show strong demand for UK hotels

In the capital markets, there has been an increased interest in the UK hotel market by overseas investors and this is driving increased competition for deals. Appetite for exposure is strong, especially with cash rich private equity funds, sovereign wealth funds and high net worth individuals all competing for assets. London trophy hotels continue to attract foreign capital and the recent sale of the UK-wide Principal Hayley portfolio to US private equity firm Starwood Capital for £360m is expected to set the tone for the rest of 2013.

High volume of distressed assets on the market

As the banks look to further deleverage and reduce their exposure to the property market, a large amount of the stock that has either recently sold or is currently on the market is distressed. The Principal Hayley portfolio was brought to market by Lloyds Banking Group and a distressed portfolio of 42 Marriot hotels was sold by RBS to the Abu Dhabi Investment Authority also in Q1.

Investment volume high in 2013

Looking ahead, there is over £1.2bn of hotel assets being marketed across the UK and investment volumes should easily exceed the annual levels we’ve witnessed in the past five years. The regions will offer possibilities especially for more opportunistic investors that are willing to accept a higher risk, with the cash rich investors also joined by the property companies and hotel specialists in the hunt for opportunity. Meanwhile in London, investors will continue to be attracted by the safe-haven status and capital preservation as well as general property performance.


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