Despite soaring consumer demand, volatility keeps capital volumes down

While UK hotels have been performing strongly, transaction volumes have not reflected consumer demand from both domestic and international travellers.

Moderating a panel of hospitality sector investors at AHC on 11 September, Ed Fitch, Head of Hospitality UK, Cushman & Wakefield, asked why volumes were down when hotel rates and occupancy are so healthy.

One of the key problems remains pricing, especially in such volatile times, with inflation, debt pricing, energy costs and economic volatility all raising question marks over future performance.

Peter Werhahn, managing director, Blackstone, said that the investment giant largely deployed capital based on thematic convictions and added that hotels was one of five core strategies.

“We are big believers in global leisure travel,” he said. “For us the UK has always been one of the key focus markets, as you can see from our acquisition of Bourne Leisure two years ago.”

Werhahn said: “We’re trying to be in sector where the demand tailwinds are so strong that operationally they can sustain a higher inflation environment. So the bar may be higher, but we are still able to deploy capital and, as things moderate, it should open up the deal flow.”

Francesco Orofino, investment VP & head of hospitality, DFI, added that his company sees leisure travel, in particular in the lifestyle and luxury segments based around the growth in global wealth, as the core target.

“Scale is very important for us because it allows us to deploy our capital efficiently. We have spent a lot of time this year on London and Edinburgh. We’ve also looked at some regional assets, with interesting price points. But single assets are quite hard for us,” he explained.

Orofino said that it was not easy to find suitable platforms, and the company has considered starting a platform from scratch with property owners.

“There definitely has been a correlation [with yields] but the pricing adjustment has not been enough. The yields need to give us headroom. Today’s pricing has adjusted but not to check all the boxes. There’s still too much volatility,” he warned. “Because of the uncertainty, we are very focused on liquidity.”

Natalia Kolotneva, head of living & hospitality Europe, asset management, LaSalle Investment Management, added that viability “is always a question mark” in terms of potential acquisitions.

“Definitely in the summer costs and energy costs stabilised. In the future, it’s all about contractors and how they are pricing their costs,” she reflected. “It’s a great time to be a lender, we are very much relationships based and we are also looking for opportunities that are well capitalised. Undoubtedly, there’s now a wider range of investors, so we’re fishing in a bigger pool.”

She said that lenders liked hospitality because it is a well understood and transparent asset class, but echoed the view of a “mismatch between vendors and buyers” in terms of price expectations.

“Even off market deals everyone knows about because there are so few deals around. We’re picking up redemptions on open ended funds, long income deals are still there, defined pensions are selling. We also need to be aware that insurers might come into the game, going in as sellers,” she said. “It’s a space to watch.”

Luc Boschmans, managing director, Tristan Capital Partners, said that the business only started actively investing in hotels three years ago.

“Scalability is essential in every strategy. We didn’t buy the Yotel [in Manchester] to have one hotel. We think we can find similar properties with our partner Hamilton. Point A [which it acquired with Queensway in 2022] is another good example, so we need a certain volume of, say, £25 million in equity at the beginning, but of course we can add small assets to our platforms,” he said.

Queensway is a specialist at converting offices to hotels, and Boschmans said that it is in opportunities such as this where the company sees the greatest potential, especially in cities such as London, Edinburgh and other UK cities, “perhaps where the current owner is struggling with ESG, for example”, he added.

He said that the company increasingly sees some flexibility with planning from local authorities in terms of change of use.

“We’ve also seen a few boomerang hotels that disappear and come back onto the market. But not that many,” he said. “But there are more uncertainties, how will ESG evolve? How sustainable are ADR rates going forwards? I believe they will mostly stick but our industry does not have a great track record when it comes to low demand periods.”

Blackstone’s Werhahn added that demand has remained resilient, and stressed that brands matter more in consumer-facing segments.

“The consumer is becoming more selective, so you really have to focus on delivery.”

Capital Talks: Leading the Way in a New Hospitality Investment Landscape took place on 11 September in Manchester at the Annual Hotel Conference.