London – £3 billion of hotel transactions took place in 2022, according to leading global property advisor Knight Frank, with the total annual investment volume c.30% below the five-year average.

With momentum from Q4 2021 continuing into 2022, UK hotel investment saw a robust first half of the year, accounting for 68% (£2.1 billion) of total annual investment. However, the volatility that arose from the war in Ukraine, combined with global economic uncertainty and the domestic political turmoil, had a material negative impact on hotel transactional activity throughout 2022.

The surge in energy costs, increasing payroll and other operational costs, the hike in interest rates resulting in the rising cost of debt and the growing threat of an economic downturn have contributed to reduced levels of investment in the latter half of 2022, with many deals having failed to complete amidst increased economic uncertainty.

This subdued investor sentiment contrasts with the strong growth and recovery of hotel trading performance in 2022, reinforcing the resilience of the UK hotel sector. The pandemic has been an accelerant of structural change, with over 19,000 rooms permanently closing over the past two years. Combined with slower growth in the hotel development pipeline, this has created a favourable backdrop for future investment. The sector is now in a strong position to navigate the current headwinds and macroeconomic uncertainty.

Despite the anticipation of distressed sales in 2023, the ongoing availability of Home Office contracts continues to provide some hotel owners with attractive short-term income streams, materially affecting the likelihood of certain hotels coming on the market. Knight Frank envisages subdued levels of stock becoming available over the coming year, increasing competition for assets, but anticipates a revival in the number of hotel portfolios being marketed next year. Different approaches to the marketing of these portfolios are likely, however, depending upon their size and makeup.

Whilst no hotel business is immune to the effects of an economic downturn, and whilst profit margins are likely to be squeezed in the short-term, operationally the sector has continued its recovery and an upturn in investment levels for 2023 is anticipated. We have seen an uptick in investor activity at the end of 2022 and purchasers who are proactively seeking out opportunities now are well placed to move quickly when new stock becomes available. Investors are showing renewed signs of confidence in the London hotel market, with overseas purchasers benefitting from currency plays.

Once the economic picture is clearer and the availability of debt recalibrates, we expect transactional activity during 2023 to rebound at a more buoyant pace, exceeding 2022 levels. With hotel property offering value and resilience relative to other real estate asset classes, a wide range of investor types will seek to deploy capital into the sector.Henry Jackson, Partner and Head of Hotel Agency at Knight Frank

About Knight Frank LLP 

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, the Knight Frank network has 487 offices across 53 territories and more than 20,000 people. The Group advises clients ranging from individual owners and buyers to major developers, investors, and corporate tenants. For further information about the Firm, please visit www.knightfrank.com.

Kyne Levingston
Knight Frank