COMMENT Investment in UK hotels plunged to a decade low last year, but there is every reason to think that the sector will bounce back in 2021 as the Covid-19 vaccination programme gathers momentum and the economy gets back to work.
Firstly, Covid-19 is not accelerating long-term structural challenges in the same way it is for other assets.
Physical bricks-and-mortar retail was already under pressure from the rise of e-commerce long before lockdown closed the high street. Food and beverage will also have to reassess its offering and need for real estate, as more people get used to ordering meals straight to their doors rather than venturing out.
Confronting and solving these issues will take time and cost money. This is not the case for hotels. You can’t digitise a bed after all, and people will still need places to stay when travelling – as well as want a place away from home to relax (we’ve all spent a long time stuck indoors).
The traveller returns
While the pandemic impact may result in a slower recovery in international business travel, demand from both tourists and domestic business travellers for trophy hotels in super-prime locations like London will remain high. They will therefore continue to attract investment once the pandemic and related travel restrictions are eased. This is borne by the fact that, even during the pandemic, London has accounted for over 85% of total UK investment volumes, including the notable sale of the Ritz Hotel for £750m last April.
The domestic tourism market also showed its resilience during 2020, and in the short term is likely to continue to lead the UK’s recovery until international travel is more freely allowed. For example, when lockdown was partially eased last summer, the total deal count outside London climbed dramatically, with interest in coastal and country hotels surging. The recent announcement by Dalata and Topland that they are developing a hotel in Brighton is a good example of longer-term investor confidence in the staycation market.
Select service hotels – budget-friendly hotels offering quality rooms and limited amenities – will also create a reliable investment opportunity for investors, as their lower operating costs mean they can break even at a reduced occupancy rate. Their trading resilience during the pandemic has also raised their appeal to investors.
Indeed, Covid-19 may even help hotels run more profitably – how many people will want their room serviced every day post-pandemic? By being able to cut down on simple things like regular room cleaning, hotel operators may be able to cut their cost and hotel operators have been forced to find cost savings.
Where banks fear to tread
Hotel investors are now beginning to think about how they can benefit from diversifying their portfolios to invest in a wide range of asset types, from super-prime to select service hotels or country house hotels.
But as in any recession, the ability of traditional investors to pour money into the hotel sector has been hampered by the difficulty in securing debt over the past year. There will be opportunities to acquire hotels, help refinance portfolios and lend to investors which are acquiring hotels – especially given that many traditional lenders may be wary of valuations in today’s climate and dealing with existing problems in their books, compounded by the lack of appetite from credit committees.
This creates a unique opportunity for nimble investors to take advantage of the increased levels of stock that are likely to come to the market in the second and third quarters of 2021. By avoiding the strict credit appraisal methods required by most banks, there is an opening for those investors which can focus more on a hotel owner’s track record, their handling of the business during the crisis and the fundamentals of the hotel itself.
As the mass rollout of vaccines gathers pace, increasing consumer confidence in the possibility of both domestic and international travel will help to encourage a revival in hotel investment. The dawn of a new long-term hotel investment cycle could be just around the corner.
Alastair Carmichael is investment director at HB Titan
