The annual round of New Year summits has revealed a sector salivating at a jump in transactions, with the regional UK playing a strong role.
Reviews of the past year saw the average sale price for UK hotels increase by 5.7%, with both the number of deals and the speed at which they are done forecast to accelerate in 2014 as buyers and sellers’ expectations align.
Transactions volumes were, according to Christie & Co, over 50% higher in 2013 than the previous year, with sale prices up 5.7%.
Jeremy Hill, director and head of hotels for Christie & Co, said: “There is still fervent demand from those with cash to invest in the UK hotel sector. This, and the improving economic situation, should see the potential for selective hotel value increases both in and outside of London in 2014, even if the trading market remains in a fairly flat position.”
Forecasts suggest that trading will be significantly better than flat, with STR Global forecasting revpar growth for this year of 4% in London against last year and 1.9% in the regions. Whitebridge Hospitality went one better and forecast 5% for London.
Hill added: “Much will depend, of course, on the levels to which the banks will be inclined to take part, but the transactional environment will see some further upturn as more consolidation looms and further brand roll-out through franchise modelling takes place.”
The company’s Business Outlook 2014 report found that London had remained at the forefront of the major deals, with the highest prices being attained, but that even in the regions values were being maintained, aided by the quality of the properties coming to market.
According to Whitebridge Hospitality, the regional UK moved up from third place in 2012 to first in 2013 in terms of most active transaction markets in the EMEA region, driven largely by the deal to sell 42 Marriott-branded hotels to the Abu Dhabi Investment Authority.
After several years of protracted deals, the speed of transactions was expected to accelerate, helped by realistic price expectations on both sides of the transaction.
In a separate study, Deloitte reported that transactions in the second half of last year were up 70% in the UK on the year, with the total transaction volume for 2013 reaching GBP3.1bn, a six year high.
Whilst the first half of 2013 was dominated by portfolio deals; namely the sale of the Principal Hayley portfolio to Starwood Capital, the acquisition by Abu Dhabi Investment Authority of 42 Marriott-operated hotels, and the acquisition of Malmaison and Hotel du Vin by KSL, the second half saw a shift back towards single asset deals, which represented 65% of transaction volume. The only notable portfolio sale in the second half of 2013 was the acquisition of the c.1,200-room Menzies portfolio by Topland.
Nick van Marken, global head of hospitality at Deloitte, said: “The spotlight has returned to hotels as an investment class, underpinned by a clear market recovery and improved macro-economics. The many portfolio deals that closed in H1 laid a fantastic base and the Hilton IPO at the end of the year underpinned the increasingly positive market sentiment.
“We expect to see the completion of a number of deals early this year; including that of De Vere Venues. Sovereign wealth funds, specialised investment groups and private equity will remain the dominant buyers in 2014, and we expect the continued influx of foreign capital.”
Hill added: “As we move into 2014, there remains a substantial amount of equity looking for opportunity. The sums now add up for going concern transactions. New hotel development is still largely predicated on lease structures with still further yield compression for prime located investments achieving 4.5% initial yield. Finance is cautiously returning for development with hotel management agreements.”
The strategies of the banks seem set to boost the hotel market still further in 2014, as Hill said: “As non-performing loan portfolios are disposed of, we are likely to see a number of reasonable quality assets reach the market through the course of the year. With the loan portfolio disposals, this should allow the banks to release funding for hotel investment – albeit more cautiously and selectively than in the days before the recession.”
HA Perspective: [by Katherine Doggrell] The transactions market in the past year has been driven by the two Ds – deleveraging and de-leasing, as so far there has not been as much distress as buyers would like. The total transaction value of assets which could be counted as distressed increased during the year in the UK, according to Whitebridge, although as a percentage of total deals it fell.
As the merry-go-round of existing stock speeds up, there is the question of new development. Banks may be getting some money back, but with eyes on capital requirements ahead of the ECB;s stress tests, they are keen to keep a close eye on it. Rising land prices also mean that the window for development based on cheap land value is slipping away
What this will mean for the brands was a repeated theme at the past week’s events. The ever-growing influence of the likes of TripAdvisor when making travel decisions has not been lost on owners, who are increasingly looking to the brands to put their money where they want their flag to be.
As owners find themselves putting their hands deeper into their pockets for hotel assets, they will be looking for reciprocation from the brands, with anecdotal evidence suggesting this is a growing trend. It’s just possible a new year may herald a new era of shared risk. Possibly.