We recently brought together a select group of investors during the Annual Hospitality Conference in Manchester to discuss what’s happening in the hospitality real estate market. Here are five key points raised during the meeting.
Investors cheered by prospect of further interest rate cuts
We are starting to come up from the lowest point in the European hospitality real estate cycle, said one investor, calling 2024: “the hardest fundraising year since the global financial crisis.”
The prospect of a steady progression of interest rate cuts over the next two years is very positive because it reduces the cost of debt and increases the valuations of existing properties, said another investor.
Nonetheless, investment in the UK hotel sector has increased in 2024 compared to 2023, according to a Savills research paper, and those selling hotel assets are a mix: PE firms, private owners, insurance companies and institutional investors.
The reasons for selling are retirement or the fund cycle reaching the five-yar mark or refinancing stages. Yet, there has not been the anticipated high level of distressed sales triggered by refinancing costs.
Construction woes hit new openings
“We’ve got trouble ahead with the construction industry. They’re having their post-Covid unravelling now, which is quite a challenge,” said one investor.
In September 2024, ISG, the sixth largest construction firm in the UK, entered administration, making 2,200 staff redundant. A third of its project pipeline was dedicated to public sector work, while industrial, commercial, and private housing projects accounted for over £2.8 billion of its active contracts. ISG was involved in several high-profile hotel projects including the Peninsula, London, and the Ritz-Carlton in Edinburgh.
In July 2024, Beck Interiors, a luxury fit-out specialist, went into administration. Recent contracts included a full restoration and refurbishment of the Cadogan, a Belmond Hotel, in Chelsea, and refurbishment of the Dorchester on Park Lane, London.
Contract wrangles have put a proposed new-build 350-room Hyatt hotel for the Edinburgh International Conference Center (EICC) on hold. The opening of the Hoxton in Edinburgh, a conversion of 11 Georgian townhouses, is reportedly delayed too.
Even without such problems, some investors viewed new builds unfavorably. “It doesn’t make sense to build anything in the regions with build costs and interest rates where they are,” said one.
The controversial influence of demand forecasts
To secure debt, investors need to provide their lenders with performance forecasts. And if the demand forecasts that come back from third-party data suppliers do not tell the story that the investor wants, there’s a problem.
One investor suggested that market data from mainstream data suppliers, whether negative or positive, carries more weight than it deserves in enabling hotel projects to go ahead or not.
Given the large differences in spending behaviour from one consumer segment to the next, generic data is of little use, said one investor.
“I think there is a massive disconnect across segments, across different types of consumers that we are seeing. So, blended data points, for us, have less and less relevance, because it’s really about looking specifically at micro locations and markets.”
Cost-of-living squeeze and cancellation rates
Participants noted a clear divergence between the spending behaviour of budget and midscale customers who are cutting down, and upscale and luxury customers who are splashing out more than ever.
A midscale customer who would normally have a three-course dinner with two glasses of wine will now have two-courses and one glass of wine.
Budget hotels, particularly in London, have faced challenges this year, while luxury hotels have been the standout performers, with Edinburgh, for instance, reporting a 14.4 percent RevPAR increase in the year to August, making it one of the strongest city markets in Europe.
In the price-conscious segments, hoteliers are experiencing last-minute cancellations of flexible bookings by customers who find cheaper alternatives elsewhere. This practice, even encouraged by certain online travel agencies, is becoming easier for the consumer due to technological advancements.
One investor noted that hotels offering cancellable rates became the norm during the pandemic and was now becoming a “massive challenge.” Perhaps it’s time to offer fewer cancellable options.
Investment pours into Preston.
One investor said he would not be by buying in Manchester now because of over-supply, but still saw good opportunities in Leeds and Birmingham. Another location experiencing significant investment is Preston with several long-term public-private regeneration projects underway.
The investor said: “Preston’s a reasonable market, but one thing I would say is that it costs roughly the same to replace an air-conditioning system in Preston as it does in London. Well, okay you’ve got a hotel that’s doing £700,000 to £800,000 EBITDA a year and you can wipe that out just by replacing the air-con. So that’s an interesting analogy. When you’re looking at buying in secondary locations, hotels still cost a lot of money to maintain and refurbish.”