• Caution comes to lagging UK market

The volume of UK hotels transactions is expected to fall this year, from GBP5.3bn last year to around GBP5bn, as portfolio transactions tail off, according to Christie & Co.

The UK has also see a change in investor profile, as private equity groups look to mainland Europe for better returns, with those who remain described as “more vigilant” by fellow broker Knight Frank.

Barrie Williams, managing director, hospitality, Christie & Co, told us that the volumes could yet move up, commenting: “You never know what large transactions are going to happen and when which can change the numbers at the end of the year as the Jurys Inn deal has done. It’s steady as you go in 2018. We’ve seen continued strength in the regional markets and portfolio deals  – we’re waiting for the Grange Hotels deal, which should be a GBP1bn portfolio and that will change the number again.

“If you look back 12 months, everyone was expecting the Asian investors to come in and do the deals, but the large Chinese investors have been unable to get their money out of China and those who have been looking at sub-GBP10m hotels in the regions, where you can get returns of 9%, against 3% in London.”

Williams reported that some investors were now looking overseas, adding: “There’s an element over the past 18 months that the private equity houses are looking for better value in Europe – Holland, Belgium, Spain – where there are better returns.

“Our European business is much more driven by hotels. There’s an element that our core UK investors have a load of equity and a load of debt out there and I expect more meetings where I am taking my head of Germany and my head of Spain along with me to offer what we have. There are easier markets out there than others – Germany is stable, Spain is popular but you have gone out to the islands.

“The UK is pretty stable, but will lag Europe as GDP grows there and the private equity groups are likely to go to other locations in Europe. In the UK we’ve had a new type of buyer enter over the period, a completely different buyer profile, shifting to longer-term holder, family offices which are looking for a freehold which they can hold for a generation. If you look at some of the transactions, there are a lot more of the institutions who don’t see the sector as an alternative point of view any more.”

In terms of ownership structure, he said: “The market is still on owner/operator and franchise models, with management contracts falling out of favour and leases in the ascendant.”

Looking at performance in the UK, Christie & Co said that, while it expected continued revpar growth driven by visitor numbers, last year it had been from tourists (up 20%) rather than business travellers (down 2.8%) with any further currency movement having the potential to impact 2018. Combined with increased stock (19,000 rooms in the UK in 2017 and 2018) and greater competition from providers such as serviced apartments, hostels and aparthotels, the effect would be to place pressure on existing, under-capexed hotels.

Williams said: “The concern I have is how people will manage costs. London had a difficult December but there is opportunity out there to increase revpar and it will be interesting to see how to grow the topline and Ebitda. On the restaurant side there are a number of conversations at the moment, but as most of them are leased they are CVAs, not administrations. There is a difference at the moment between hotels and restaurants – restaurants have to be upgraded ever three to four years.

“The good hotel operators have always been very innovative in terms of what is thrown at them. There is no need to have people standing around when they are no needed at checkout and checkin. Depending on the type of hotel it depends on the type of people you need. It comes down to the type of owner what type of hotel you want. If you look at the private equity houses, who look at returns, it’s easy to make returns from the bed factories which don’t need as much staffing. But if you are looking at more of a trophy asset, there will be less of a focus on driving the performance.”

HA Perspective [by Katherine Doggrell]: Williams’ comments were echoed by Knight Frank, with Julian Evans, head of healthcare, hotels & leisure, commenting that: “the continued uncertainty over Brexit has been a contributing factor in the pool of potential buyers narrowing and with buyers becoming more vigilant, taking greater time to complete their due diligence”.

As Williams commented to us, yes, transactions are likely to fall, but remained on track when looking at the long-term average, ignoring the recent, more perky years.

Another geography looking less perky was the US, where caution was also poking a querulous head above the parapet, Moody’s having warned that the sector was “approaching a cyclical peak”, with the revpar growth having “contracted materially” since 2015 after having consistently exceeded the rate of inflation for the prior five-year period.

The peak of the US market was muttered about during the last results season and STR reported that year-on-year supply growth had reached 2% for the first time since May 2010 in December. The organisation also pointed to demand being up 4% to compensate, although much of this was driven by demand from government employees dealing with the hurricane season. Whatever your feelings on the speed and veracity of climate change, the consensus is that extreme weather events are bad, rather than good and hotels may have to start battening down the hatches for the slide down the peak.

Additional comment [by Andrew Sangster]: Are we really at the cyclical peak? Fortunes are made and lost on such calls. Right now the evidence is mixed.

Brexit looks to be a negative at least in the short-term with even its biggest supporters now confessing that a hockey stick like dip and then rise is on the cards. But adding a bit more friction into the UK’s trading relationship is unlikely to knock the wind completely out of the sails of global growth.

The International Monetary Fund is now saying we have the broadest synchronised global growth upsurge since 2010. This is saying something given that 2010 followed 2009, one of the worst drops in economic output on record. Economists now widely expect the boost from global growth to outweigh any Brexit negatives.

While the Chinese are no longer keen on hotels (in August 2017 the General Office of China’s State Council made this clear by making real estate, hotels, film theatres, the entertainment sector and sports clubs “restricted investments”) there’s still plenty of capital elsewhere.

At the Christie & Co reception held for the launch of its Business Outlook, journalist Andrew Neil gave a bullish speech, suggesting the cycle has some years left in it yet if the monetary authorities are cautious in how they end the current stimulus. Never have Central Bankers been paid so much attention.

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