The UK's hotel market is expected to remain broadly stable over the course of 2012, although establishments in London will outperform their regional counterparts, due in part to the anticipated boost from both the Olympic Games and the queen's diamond jubilee celebrations. In its latest UK Hotel Investment report, Savills revealed investment volumes in the asset class increased marginally - by 0.8 per cent - in 2011, although 68 per cent of the money ploughed into the sector was spent in London and the south-east of England. In addition, average prime UK hotel yields remained steady at 6.5 per cent throughout last year and it is likely they will stay at this level going forward.
However, investors may hit problems with financing, as there is still a shortage of debt available for purchases in the hotel sector. Robert Seabrook, of Savills Hotels and Healthcare, believes this should not be too much cause for concern, though. He commented: "Lack of debt is more of an issue for the hotel sector, but the lure of the London trophy asset continues to attract overseas investors." The firm pointed out real estate investment from abroad was primarily focused on the prime end of the market, while UK institutions snapped up hotels in the budget sector. One of the reasons why institutional investors targeted this part of the industry last year is due to the majority of budget operators running hotels under leases, rather than management contracts. According to Savills, this makes these units "more palatable to institutional investment".
Chief executive officer of northern Europe at Jones Lang LaSalle Hotels Jonathan Hubbard noted earlier this month that the "flight to quality" among overseas investors did not only occur in the UK hotel market, but also elsewhere in Europe. He revealed Middle Eastern and Asian investors showed a particular interest in this asset class last year, while sovereign wealth funds and high net worth individuals were among the other players to invest in the prime end of the sector.
In addition to issues with debt financing, the ongoing crisis in the eurozone is expected to dampen investor confidence for the foreseeable future. Any activity in the hotel investment market is therefore likely to centre on London, rather than the UK's regions. Savills is predicting capital growth of 3.9 per cent for hotels in the city, although establishments elsewhere in the country are likely to see values slide by 3.3 per cent by the end of 2012. Meanwhile, there are concerns that the operational performance of hotels in both London and the rest of the nation may take a hit this year, although the Olympics and diamond jubilee are expected to provide a significant boost to accommodation providers in the capital. These worries may be somewhat allayed by the findings in the TRI Hospitality Consulting UK Chain Hotels Market Review for January, though, with the organisation revealing London hoteliers saw their average profit per room increase by seven per cent in the first month of the year, compared to the same period in 2011. Regional establishments, on the other hand, saw profit per room fall by 14.4 per cent year-on-year in January.
However, it is not all bleak for the rest of the UK, with Savills stating there are "some potential green shoots that may provide some support to the regional hotel market". The company's report cited the following example: "The surprise tick-up in consumer confidence seen in January, which tends to pre-empt retail spend, may mean that we see renewed domestic tourism demand bolstered by the feel-good factor associated with the Olympics and the queen's diamond jubilee." Meanwhile, figures published by the Office for National Statistics earlier this month revealed the number of trips made to the UK by overseas residents increased by four per cent in 2011, compared to the previous year. Both business and holiday visits were up by four per cent during this period.
The Savills UK Hotel Investment report is available for download in full here (exclusively for IPIN members)