Specialist investors, HNWIs and family-offices drive hotel investment in H1 

There has been a “noticeable shift” in buyer profiles for UK hotel investment in the first half of the year, with specialist hotel-focused investors, HNWIs and family-offices accounting for 70% of transactions, according to new research from Knight Frank.

It comes as hotel transaction volumes hit around £860m in the period, some 60% below the prior year, reflecting a gap between trading performance and transactional activity as hotels welcomed a strong recovery in their trading. 

With London’s ADR tracking above inflation and ADR for regional hotels on par with 2019, this resilience in trading is attracting investor sentiment in the sector, according to Knight Frank. It argued that an appetite to secure quality hotels in prime locations, or sites with repositioning and value-add potential, remains strong.

During the first half of 2023, specialist hotel-focused investors, HNWIs and family-offices accounted for 70% of the transaction volume, with buyers sourcing “quality, sizeable” assets. These deals, which were mostly off-market, totalled approximately £600m and saw an average transaction price per room of £273,000 per room, some 75% higher than the UK average, the research found.

Overseas investors accounted for 41% of the transaction volume during the period, as the sterling exchange rate remained relatively low in historical terms and competitive against other overseas currencies. Much of this investment originated from Europe, Middle East and Asia.

Elsewhere, private equity investors are set to re-emerge once the economic outlook becomes more certain and the cost of debt and financing retreats. 

Knight Frank found that more capital from institutional investors exited the sector than was invested, in part due to the upward movement in gilts, uncertainty regarding interest rates, compliance to meet new fire and safety regulations, as well as ESG criteria becoming “far more rigorous”. 

Where fixed-income, budget hotels stock transacted, these transactions were almost exclusively from cash buyers, “motivated by their long-income, and often possessing some knowledge or attachment to the local market”. These buyers have been a combination of private buyers, family offices and leading hotel owners and operators.

Knight Frank said it anticipates that the next six months should see “more robust” levels of investment activity, with several hotel deals known to be under offer. It warned that the level of activity will still depend on how much further tightening of monetary policy is required in the short-term. 

Philippa Goldstein, senior analyst, Hotels and Leisure at Knight Frank, said: “With the continued rise of interest rates, this has created upward pressure on yield requirements, but with greater resistance than compared to other property sectors. Hotel room rates, particularly in London, are keeping pace with inflation and with robust levels of trading, where cashflows have increased, this is helping to limit the negative effect on value.” 

Henry Jackson, head of Hotel Agency and Partner at Knight Frank, added: “Movement in pricing provides opportunity for buyer and seller price expectations to be realigned and further incentivises other types of investors to enter the market. 

“HNWI and family offices are certainly becoming more active in the sector and with the increasing cost of debt finance they can outbid other types of buyers. Where assets have been operating exceptionally well, we are seeing competitively priced assets attract multiple strong offers, proof that capital is readily available where investors can see value.”