I think most of us in the UK hotel investment market will look back to early 2022 and recall positive sentiment for the year ahead and a sense of light at the end of the tunnel. In reality, the year brought in a number of headwinds for the sector; but with 2023 ahead of us could there be a glimmer of change on the horizon?

After the disruption of the COVID-19 pandemic, the first half of 2022 saw a healthy recovery of UK hotel transactions with volumes exceeding £1.8 billion, outperforming both 2020 and 2021 by 15% and 32%, respectively. A handful of significant portfolio deals, among which were the Inn Collection, Point A, The Pig Group, and Chardon Group, helped to illustrate the revitalised confidence in the sector and the beginnings of a strong – yet short-lived – rebound.

Into the second half of the year, however, the market saw a significant drop-off in activity, attributed to economic and political uncertainty in the UK and Global markets, with the availability and cost of debt constricting deals. As a result, estimated H2 2022 transaction volumes were down 58% compared to the same period in 2021.

Preliminary hotel transaction volumes for the full year 2022 for the UK sat at £3 billion, down 28% on 2021 but up 29% on 2020.

UK Transaction Volumes— Source: Source: Cushman & WakefieldUK Transaction Volumes— Source: Source: Cushman & Wakefield
UK Transaction Volumes— Source: Source: Cushman & Wakefield

The percentage of overseas investors stood at just 26%, unsurprisingly lower than the prior two years given the UK was considered one of the losers of the onset of recession within Europe, deterring international capital. The buyer field was dominated by institutional and private investors, largely from the UK, which accounted for almost three quarters of transaction volumes.

Transaction volumes were evenly split between London and the regions, with 49% of deal volumes attributable to the capital. The uncertainty in the hospitality market in both 2020 and 2021 due to COVID-19 resulted in investors mostly turning to London assets for their security and rarity factor. The larger share of regional transactions in 2022 can be explained by early signs of recovery in H1 combined with the dominance of staycations and leisure.

UK Transaction Volumes - London vs Regional— Source: Source: Cushman & WakefieldUK Transaction Volumes - London vs Regional— Source: Source: Cushman & Wakefield
UK Transaction Volumes - London vs Regional— Source: Source: Cushman & Wakefield

With inflation and interest rates remaining high in the mid-term, it is anticipated that transaction activity will be slow-going in the first half of 2023. A certain level of distressed or pre-emptive sales may hit the market as a result of pressures from lenders surrounding refinancing events or due to funds facing high redemption requests. However, we can expect these cases to be off-market and resolution-based processes.

Inflation is expected to fall in the second half of 2023, which in combination with dry powder waiting to be deployed and a weakened GB Pound, could encourage overseas capital to return to the market.

Furthermore, M&A may also see an uptick in activity with smaller platforms looking for external capital to weather ongoing headwinds.

Hotels remain a strong hedge against inflation and should be deemed as an attractive asset class in 2023. Top-line trading performance delivered in 2022 is illustrative of the recovery of the sector, however, challenges will continue to be faced with rising costs threatening capital values.

We should expect prime assets to hold their yield profile and demand to remain high for the right deals. On the other hand, appetite and pricing may well slip for assets in tertiary locations or with low ESG credentials – a key trend which is now trickling into pricing negotiations more frequently.

Oversupplied markets will see accentuated challenges in 2023 unless propped up by government contracts; expiration of fixed utilities contracts and changes to business rates will also be divisive within the market, creating winners and losers.

With experience transacting hotels throughout previous cycles, we have evidence that deal activity will always return. The main question mark we face at present is when and where pricing will stabilise and the key decision maker in this regard is the lenders. Once the UK economy is stabilised, which I’m confident it will, debt will ultimately flow through to the market and deal volumes should return therein.

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Rob Seabrook
Head of Hotel Transactions EMEA
Cushman & Wakefield