UK transactions dropped by 70% on the year in 2020, with the main drivers retirement sales, hotels sold for alternative use, non-core assets sold to bolster equity and non-alignment of shareholder interests.
The figures were released as the sector continued to campaign for government support as lockdown restrictions continued.
Knight Frank said that it expected to see the beginning of “a strong recovery” during the second half of the year, driven by the mass vaccination campaign.
The UK hotel sector which saw investment volumes in 2020 total £1.8bn, compared to total investment of £6bn in the previous year, with 81% of the transaction volumes in the first quarter. London, which accounted for 76% of the total UK volume, witnessed a decline of 49% in transaction volume, with the sale of The Ritz contributing £750m to the capital’s total investment of £1.4bn.
Economic disruption, forced temporary hotel closures as well as restrictions on travel and social engagement, due to the ongoing pandemic, all contributed to the level of hotel investment being severely curtailed, with a dearth in portfolio activity. Whilst overseas investment declined by 44%, Qatari, Israeli, USA, Singaporean, Thai and European investors accounted for 63% of the total UK hotel investment.
Henry Jackson, head of hotel agency, Knight Frank, said: “Despite the extreme challenges that the UK hotel sector is enduring, the long-term fundamentals remain positive and the sector will recover as the economic landscape starts to revive. Achieving a successful mass vaccination campaign is vital to the lifting of the current trading restrictions imposed on the sector, which in turn will lead to an increased level of hotel investment.
“We envisage an increase in Covid-induced investment activity from Q2 and thereafter, driven by pressure exerted from stakeholders. With softer pricing available, this period immediately following the Brexit transition may serve to further strengthen investor appetite, attracted by long-term investment prospects. We expect to see overseas investors target quality assets in London and other gateway cities, as well as further repurposing of assets and land sold for alternative uses as investors continue to diversify their portfolios throughout 2021.”
The company said that it saw potential for owners to bring assets to market in the first quarter, as vendors looked to capitalise on limited sales opportunities. Once the mass vaccination campaign advanced, the second half of 2021 was set to drive strong demand for hotels, with the domestic leisure market.
However, for many hotels this recovery may come too late, given the extended time in a national lockdown and the likely continued localised and sector restrictions thereafter. As such, Knight Frank predicted an increasing number of distressed assets and consensual sales, due to the lack of cash reserves.
The comments came after HVS London chairman Russell Kett warned last week that independent hotel businesses with constrained financial resources or liquidity would be hardest hit in the latest lockdown in the UK.
Kett said: “For hotels and the wider UK hospitality sector, 2021 is going to be very tough. While any eventual growth in top-line revenues over 2020 levels will be a cause for celebration, operating profits will be anaemic and less than half of 2019 levels in the provinces and around a third of 2019 levels for London hotels. When fixed costs are then deducted, many operations will be loss-making and will experience negative cash-flow until strong revenue gains can be made.
“Independent hotel businesses with constrained financial resources or liquidity will be hardest hit. Larger hotel groups and owners with capacity to inject additional funds will be less at risk. Smaller independent operations that have a more hand-to-mouth existence will be at particular risk.
"On the demand side, pent-up demand is high, but so is confusion; confidence around making booking commitments is low. As confidence builds on the back of the vaccine roll-out and progress is made in the mass immunisation of the population, and as lockdown conditions hopefully are relaxed by the end of Q1 or early Q2, so with the summer in prospect, that pent-up demand should be unleashed. However, support is needed now, so that these businesses will still be standing to capitalise on the upswing and thus bring the wider benefits to the overall economy with them.”
Insight: Pent-up leisure demand is now at the levels where this hack is losing precious time gaping in the street at posters advertising suitcases. The BBC reported that it was getting record viewing figures for Death in Paradise, despite its dreadfulness, because it’s set on, well, a paradise island.
There can be no doubt that once All This has passed that those lucky enough to still be in employment will be off on quite the tear, and happy days will be very much here again.
But in the meantime, in the UK, which lags behind Europe in terms of sector support, that has to change. The message so far has been that hotels can stay open under lockdown (under wildly restrictive circumstances) so what’s the problem? This study and others have reported on the wall of money waiting for distress. So, realistically, when one hotel goes bust, it’s not going to mean one less hotel.
But it will mean one group of people who have put their all into that hotel not only being out of work, but being significantly out of love with the sector. Because what the hotel market has been starting to appreciate in recent years is that it needs to walk the walk when it comes to service. This is - broad-brush time - something which is seen more in the independent sector than elsewhere, the very sector that is most under pressure. A loss to one may well be a loss to all.