We’re more than halfway through 2022 and the ebullience the UK hotel investment industry felt at the start of the year has given way to uncertainty and, in some cases, concern over the direction the economy is heading.
That uncertainty provided the backdrop for the latest advisory board meeting for the Annual Hotel Conference. Representatives from banks, law firms and other stakeholders gathered to discuss the biggest issues of the day.
Here are four takeaways from the discussion:
The rise of micro markets
The pandemic broke forecasting as we know it, meaning it is difficult to use historical data to make a plan. At the same time it has encouraged an even greater fragmentation in regional and even local markets.
Asset manager Michaels and Taylor oversees a portfolio of 24 hotels in the UK and Peter Hales, managing director, managed hotels, said the performance of each one was increasingly been driven by different factors.
“You've got […] fantastic hotels that are doing really well on leisure, some that are doing really well on business, some are driven by projects. And so you can't really say this is the trend because you've got 24 little micro markets of why is that hotel doing well,” he said.
Better cost control
The economic environment across the world is causing hotel operators and investors to rethink their strategies but the UK is also going through its own episode of political upheaval. A series of scandals eventually forced prime minister Boris Johnson to resign and his successor will be announced in September. Until then, however, there will be a political void with no one at the helm.
The cost-of-living-crisis is hurting consumer spending and there is still frustration in the industry that the nothing is being done to try and alleviate the chronic labour shortages. All these are headaches but is the industry in a better place to understand and deal with the challenges than before? Arguably because of the damage caused by the pandemic, it is.
“We've become a lot more attuned to looking at our costs and a lot more detail, understanding the cost lines, understanding our business better. So I think now we're seeing these cost pressures, I think we have a better grasp of our business. And hopefully, they'll put us in good stead to weather through this period of time, [and] hopefully emerged stronger and leaner,” said Al-karim Nathoo, CEO of 4C Hotel Group.
Yields holding up… for now
Are you a glass half-full or half-empty person? As things stand, valuations are looking fairly steady at the moment but on the horizon we have labour issues, we have inflation. Both of which are expected to haven impact further down the line.
“Yields are holding, there's still huge interest in our sector, which is fantastic. And some of that comes because of the fundamentals are there, we're having great trade, yes, there are issues that are coming down the pipe. But at the moment, we're not being impacted,” Julian Kemp, senior director, advisory services at CBRE.
Institutional investors favour limited service
It’s been interesting to watch the big institutional players like of Abrdn and Legal & General move into the operational side of hotel investment over the last couple of years. It’s a trend worth watching in itself but it’s also worth looking at what assets these firms are interested in.
“We understand we're not experienced hoteliers, we're not hospitality people. So we don't want to necessarily get involved in wedding venues, golf courses, running functions, a nice, simple, replicable structure is what we're looking at because ultimately for us, the main driver of investing in hotels is a long term income stream,” said James Dunne, head of UK transactions, real estate at Abrdn.
It’s a similar story for Louise Burney, senior asset manager, managed fund (alternatives), at Legal & General Investment Management (LGIM), although it wasn’t necessarily a hard and fast rule and would depend on the circumstances.
“In terms of repurposing assets, that's probably where we may look at what actually is the best asset for that location rather than being very limited service focussed. But buying in new assets, it would primarily be limited service at the moment,” she said.