Around £2bn of UK hotel transactions were recorded in 2023, according to new data from Knight Frank, though investment levels hit their lowest level since 2012.
While Knight Frank found that Q4 was the strongest quarter of the year with £615m of deals, the rising cost of debt, elevated operational costs and a “widening mismatch” between buyer and seller price expectations contributed to an overall decline in investment activity over the year.
Total annual investment volume fell for the third consecutive year, down by 37% on the previous year and some 57% lower than the 10-year average.
Excluding the Covid-impacted year of 2020, investment levels were at their lowest since 2012.
However, the “encouraging increase” in investor activity seen at the end of 2023 is set to build momentum through 2024, Knight Frank said, amid investor demand and a narrowing of seller vs buyer expectations, together with possible interest rate stabilisation or even cuts.
The UK hotel market continued to appeal to overseas investors over the year, as foreign investment totalled over £760m, 39% of the total deal volume. Activity from continental European investors recorded an annual uplift of 40% in 2023 to over £350m, whilst capital sourced from the Middle Eastern and Asia also increased.
The challenging macroeconomic environment led to a “significant” fall in investment in Q2 and Q3, and the pool of buyers restricted to mostly experienced hotel owners, HNWI and family offices seeking long-term investment opportunities, and those private equity players already with a standing in the market. These investors accounted for over 70% of the total annual investment volume.
Demand for high-quality London hotel assets with strong brand recognition, combined with the city’s ongoing recovery in hotel trading performance, has seen London’s hotel values per room increase by 22% year-on-year.
Henry Jackson, partner and head of Hotel Agency at Knight Frank, said: “We have seen an encouraging uptick in investor activity at the end of 2023, with demand for London hotel assets particularly positive. Geopolitical tensions have potential to limit overseas capital flows, and the upcoming UK and US elections are likely to weigh in on investment decisions.
“Yet, 2024 is expected to be a pivotal year, we anticipate that with the higher yields associated with operational real estate and the living sector driving an increasing allocation of capital, hotel investment will recover at a more buoyant pace as the year progresses.”
He added: “Hotel property continues to offer value and diversification of risk, and with hotel yields stabilising and trading expected to maintain its momentum despite low economic growth forecast, we envisage a greater volume of diversified capital to be deployed into the sector in 2024.”
