UK HOTEL RESEARCH CAPITAL MARKETS INVESTMENT REVIEW 2018 HIGHLIGHTS

Transcription

1 UK HOTEL CAPITAL MARKETS INVESTMENT REVIEW 218 HIGHLIGHTS UK Hotel investment totalled 5.5 billion in 217, with Regional UK representing 56% of total investment Private equity investors ranked as the top investor type with investment totalling approximately 1.5 billion Overseas investors accounted for over 2.3 billion of investment, with a growing acceptance to deploy funds into prime regional UK cities

2 TRANSACTION OVERVIEW An exceptionally strong level of investment activity in the UK hotel market during the second half of 217 has resulted in total investment volumes of 5.5 billion recorded for the year. FIGURE 1 UK total hotel investment volumes , 8, 7, 6, 5, 4, 3, 2, 1, 27 Single asset Portfolio Investment Development 11-Year investment volumne This equates to a 44% rise in investment activity compared to the previous year, on par with the transaction volume witnessed in 27 and significantly above the 11-year average of annual hotel investment activity of 3.4 billion per annum. Furthermore, in 217 total UK hotel transaction activity represented 33% of total investment volumes in the UK Specialist Property sector, an increase of 4% compared to the previous year, demonstrating the attractiveness of the UK hotel property sector as a means of providing enhanced, longer-term income in the alternative property sector. Following a modest start to the year with hotel investment totalling 1.7 billion in the first six months, corporate portfolio activity dominated during the second half of the year with investment totalling 1.9 billion and London deal flow at its peak with approximately 1.5 billion of asset sales transacting. Investment from overseas investors was particularly active, with total overseas investment accounting for 42% of the total UK transaction volume, a sharp rise compared to 216. Whilst the Brexit induced fall in the value of sterling has contributed significantly to the increase in overseas investment, 217 has witnessed the acceptance by overseas investors to deploy their funds into assets located in prime regional UK cities, with the potential for both income and capital growth. In 217, overseas investors accounted for over 2.3 billion of investment into UK hotel assets, divided equally between London and regional UK, with foreign investment successfully targeting 38% of the total regional UK sales volume and 48% of total investment activity in London. The Crown Hotel, Harrogate (Fragrance Group) 2

3 UK HOTEL CAPITAL MARKETS 218 Strong surge in regional UK investment A plethora of investors from both overseas and the UK, combined with the wide availability and diverse sources of capital, have helped fuel regional UK investment activity. Transaction volumes were further boosted by a number of portfolios deals brought to market and through the disposal of a number of individual assets deemed to be noncore, which were purchased as part of larger portfolio transactions during 214 and 215. In 217, the share of regional UK s transaction volume increased to 56% and totalled some 3.1 billion from some 247 deals, with the total deal count increasing by 32% in 217. Portfolio activity made up 5% of the total regional UK investment volume, totalling some 1.5 billion, and which represented 78% of the total UK portfolio investment activity. Meanwhile, single asset investments in regional UK accounted for 6% of the total volume of single asset transactions in the UK and made up 28% of the regional UK s total investment activity. The average price per room, which transacted across regional UK (excluding developments and ground lease transactions), increased by 28% compared to the previous year, to approximately 115,. This surge in value can be largely attributed to the quality of the corporate branded product included in the portfolio transactions, where the average price per room transacted at around 141, per room. Testing times for London s transaction market In 217, whilst London hotels benefitted from the weakened Pound, resulting in a record number of inbound visitors and which provided the impetus for a solid year of RevPAR and GOPPAR growth, only limited hotel stock was brought to market as hotel owners chose instead to reap the rewards of a strong trading environment. London s top four transactions accounted for over 6% of London s total transaction volume (excluding developments). The uncertainty of protracted Brexit negotiations, the full price of London s hotel assets and continued yield compression have all contributed to investors seeking opportunities outside of the capital. Despite London witnessing over a 7% increase in investment volume, totalling approximately 2.1 billion (excluding developments) and a 45% increase in the value of the average room transacted, the number of hotel deals that transacted in London during 217 were fewer than the total number of deals in the previous year. Whilst investment deals increasing extensively by over 2%, London witnessed a 4% decline in the volume of single asset deals to approximately 6 million, with only 14 hotels changing ownership compared to 22 the previous year. This decline in activity has resulted in London s share of the UK s total single asset transactions falling year-on-year, from 62% in 215 to 4% in 217. Meanwhile, fewer fixed lease hotel deals took place in London during 217, with a 24% decline in volume and development deals fell by 4%. Private equity ranked as top UK buyer and seller in 217 Whilst private equity investors were ranked overall as the top investor type into UK hotel property during 217, with investment totalling 1.48 billion, they were ranked only 3rd in London and 2nd in regional UK. The top three players, Aprirose Real Estate Investment, Henderson Park and Westmont were responsible for 9% of the total Private Equity investment, adding approximately 6,7 rooms in total to their portfolios, with an average price per room of 197, per room. In 217, the volume of private equity asset disposals surpassed the volume of private equity capital invested into the sector, with over 2.2 billion of capital divested. This level of activity highlights that the life cycle of an investment held by a private equity investor is one of the shortest, compared to other investor types. The two largest disposals in the FIGURE 2 UK hotel investment volume per quarter Investment volumne ( million) ( million) 2,5 2, 1,5 1, 5 FIGURE 3 UK Hotel transactional activity London v Regional UK , 8, 7, 6, 5, 4, 3, 2, 1, 31% Q1-216 Single asset Investment % Q2-216 Regional UK London % Q3-216 Q Q YR average regional UK 7-YR average London 214 Portfolio Development 24% 17% 14% Q % Q % 3% Q % 45% 4% 35% 25% 2% 15% 1% 5% % 217 % Share per Qtr 3

4 FIGURE 4 Total UK hotel investment volume 217 by investor profile (buyers v sellers) Buyer Seller Buyer average price per room transaction 2,5 3, The appetite for quality regional UK hotels will remain buoyant in 218, with strong demand from institutional, private equity and overseas investors. Investment decisions will be determined by income security, strong covenants, potential upside and competent management. London Regional UK Fixed Lease Ground Lease Long Leasehold Vacant Possession Managed / Franchised Variable Lease Development Fixed Lease 7% 5% HENRY JACKSON, KNIGHT FRANK, HEAD OF REGIONAL UK AGENCY FIGURE 5 Institutional investment activity by investment model 2% 15% 38% 34% 12% 24% 23% 3% 37% Transaction volume ( million) 2, 1,5 1, 5 Private Equity Institutional Investor Overseas Corporate Hotelier Note: The Average Price Per Room Transacted excludes the sale of Grosvenor House, A JW Marriott Hotel. hotel sector in 217 came from portfolios sales unloaded by private equity investors. Lonestar traded the Jurys Inn portfolio for 8 million, having acquired the portfolio in 215. Meanwhile, Bain Capital Credit & Canyon Partners agreed the 525 million sale of The Q Hotels portfolio to the private equity investor, Aprirose Real Estate, having acquired the distressed loan portfolio in 214. This transaction then resulted in further investment activity, with the simultaneous structuring of a ground lease deal, involving the sale of the freehold of 17 of the assets to an institutional investor. In order to generate the high level of investment returns projected, private equity funds employ strong asset management teams, often with specialist hotel-sector expertise, in order to develop a clear vision prior to purchase and to unlock the value during the term of the investment, driving untapped potential from the property and operating business. In order to deliver the superior returns required by private equity investors, asset managing the bricks and mortar remains a key element, but having confidence in the strength of the operating business, management team, brands and concepts are equally all critical components, prior to executing a planned, finite exit strategy. Private equity investment will remain a strong feature of the hotel investment market in 218, with a number of investors further diversifying by offering Overseas Corporate Investor UK Corporate Hotelier UK Corporate Investor structured loan facilities from the creation of specialist dedicated credit funds, with the purpose of providing customised hotel funding solutions. Institutional investor demand on the rise 25, 2, 15, 1, 5, Over the past investment cycle, as hotel real estate has cemented its position as a mainstream asset class, the resurgence and renewed popularity of leases, as a means of separating the risk of owning the property from the hotel operating business, has provided institutional investors with an attractive, low-risk, long-term strategic model, in which to invest and diversify their portfolios. With the increasing demand for commercial investments involving fixed, variable and ground-leases as well as forward funding hotel developments, it comes as no surprise that Institutional Investors were strong buyers during 217, ranked as second, with investment totalling 1.38 billion. This illustrates that hotel real estate remains an attractive long-term investment in a diversified investment portfolio, whereby hotel investments have the potential for higher returns and the ability to match long-term liabilities with long-term investments. Over 6% of institutional capital invested in hotel transactions was secured with either a fixed, variable, ground or long lease interest. Meanwhile, 26% of institutional investment targeted Average price per room transacted ( ) 4

5 UK HOTEL CAPITAL MARKETS 218 developments, secured with an operational fixed lease in place upon the project completion. Regional UK attracted over 5% share of the total institutional investment volume in 217, however, the number of deals transacting in the provincial markets was four times higher than compared to London, with over 4 deals. Fixed or ground lease investments comprised over 7% of institutional activity in regional UK, compared to just over a quarter of activity in London. Institutional investment from overseas represented less than 3% of the total volume, with their investment targeting properties sold on a vacant possession basis and now operated by third-party management companies, such as Kew Green and Bespoke Hotels. The attractive risk-return profile of the hotel sector, combined with the opportunity for diversification and favourable as well as alternative demographics compared to other sectors in commercial property, have given rise to strong and growing demand in the sector by institutional investors, fuelling the overall level of hotel investment in 217. The acquisition of a trading asset, by LGIM Real Assets (Legal & General), of the 357-room Hampton by Hilton Stansted Airport, which operates under a management and franchise agreement, confirms the strong appetite by institutional investors for hotels with solid fundamentals. The high quality location of the newly developed hotel, combined with the strength of the brand, the proximity to a major demand generator and the highly cash generative capability of the newly trading asset were all major factors in the investment consideration, a trend set to continue as institutional capital intensifies. Overseas buyers attracted by the weak pound In London, Overseas Corporate Investors ranked as the highest spending investor by transaction volume in 217, whilst in regional UK, Overseas Corporate Hoteliers achieved the top spot. This endorses the level of overseas investor interest into the sector, with over 2 billion of investment from these two investor groups. Significantly, the net capital flowing into the sector, from the Overseas Corporate market was the highest of all investor types at 1.2 billion, with relatively few asset disposals during 217. Such activity suggests that despite the ongoing uncertainty surrounding Brexit, overseas investors continue to FIGURE 6 UK hotel investment investor origin 217 UK East Asia 14% 16% USA Sweden / Israel European Other 9% 2% 1% 58% The Q Hotel Group, Oulton Hall, Near Leeds (Aprirose Real Estate Investment) 5

6 INVESTMENT FROM THE ASIA PACIFIC REGION INCREASED BY OVER 65% TO APPROXIMATELY 5 MILLION IN 217, OF WHICH SINGAPOREAN CAPITAL REPRESENTED 63% OF THE INVESTMENT. have confidence in the UK hotel sector, taking advantage of an increase in overseas visitors to the UK and a period of robust trading, whilst also taking into consideration the exchange rate and the cost implications of currency fluctuations when transferring funds overseas. Pandox and the Fattal Hotel Group s 8m joint acquisition of the Jurys Inn portfolio, was instrumental in taking the Overseas Corporate Hotelier to prime position as the regional UK s highest investor group. Nevertheless, over 3 separate hotel transactions were completed by this investor group, reinforcing the attractiveness and resilience of the regional UK hotel market. Investment from the Asia Pacific region increased by over 65% to approximately 5 million in 217, of which Singaporean capital represented 63% of the investment. Corporate hoteliers from Singapore were particularly active, which included CDL Hospitality Trust s acquisition of the Lowry Hotel in Manchester for 52.5 million; HPL Properties acquisition of the Hilton London Olympia for 115 million and the Fragrance Group organically acquiring a collection of seven hotels located nationwide, some 75 rooms with total investment in excess of 5 million. In London, meanwhile, leading transactions from overseas corporate investors came from the USA with Ashkenazy Acquisition Corporation s 6 million purchase of the Grosvenor House JW Marriott Hotel; Pandox s 8 million purchase of Hilton London Heathrow Terminal 4 and Tian An China Investments acquisition of the South Place Hotel for 67 million. Overseas Private Equity investors were the only other main source of overseas capital, with approximately 25 million of investment, all of which originated from the USA. Vacant possession transactions dominate the UK hotel market in 217 In 217, hotels that sold with vacant possession* represented the largest group of hotels changing hands in the UK, in terms of investment volume and rooms transacted, with a total value of over 2 billion, equating to a market share of 4% in terms of investment volume and 48% of the total room stock. The two major UK regional hotel portfolio transactions sold on a vacant possession basis, acting as the major catalyst behind the increase in volume and contributed significantly to the 5% rise in the average value per room, for regional UK hotels sold on a vacant possession basis. Significant variation existed between regional UK and London, with less The Q Hotel Group, The Midland, Manchester (Aprirose Real Estate Investment) 6 *Vacant Possession refers to hotels that are for sale, free and clear of incumbent management, excluding franchised properties

7 UK HOTEL CAPITAL MARKETS 218 than 1% of the transaction volume in London selling with the benefit of vacant possession, compared to 62% in the provinces. Furthermore, in London, the volume of activity declined by 51% compared to 216, with no big-ticket hotel assets transacting on a vacant possession basis. Subsequent to the sale of the Q Hotel portfolio, Redefine BDL Hotels were selected as the third-party operator for the portfolio, and in doing so became the most active operator in the UK in 217, with the net addition of over 3 hotels, some 4,6 rooms, to its management portfolio. Meanwhile, following the sale of the Jurys Inn portfolio and the Portland Hotel Group in Scotland, Leonardo Hotels became a major national operator in the UK, adding over 4,5 UK hotel rooms to its portfolio and the operations platform for the Jurys Inn brand. Continuing the growing trend of operating leases and a renewed willingness by operators to commit to leases, 218 will see the restructuring of the Jurys Inn portfolio, involving 2 properties, whereby Leonardo Hotels will enter into a revenue-based lease agreement, with minimum rent guarantees, for a consideration of approximately 12 million. The Crown Hotel, Harrogate (Fragrance Group) HOTEL GROUND RENTS A RISING PHENOMENON, FAST BECOMING MAINSTREAM INVESTMENTS During 217, the hotel sector, particularly in regional UK, fully exploited the commercial ground rent market, with a strong uptake in demand. Over 265 million of ground rent transactions completed, across 12 separate transactions, involving some 29 properties and over 4,2 rooms. The insatiable demand from institutional investors ensured that this investor type swept the market for all ground lease transactions, with record yields achieved, between 2.3%-3.3%. With hotel cash flows typically growing in line with inflation and hotel assets considered less likely to become functionally obsolete, due to the ongoing level of capex invested by the tenant, this form of investment structure lends itself favourably to hotels as an asset class. A hotel ground lease, acts as a hedge against inflation and offers the institutional investor the opportunity to diversify their investment strategy, with the structure considered to offer a highly secure, long-term income stream, derived from prime assets. The largest hotel ground rent transaction to take place in 217 followed the successful acquisition by Aprirose Real Estate of the Q Hotel Hotels as an asset class are uniquely placed to create ground rents structures. They enable owners to enhance return, essentially securing long term financing at a fixed rate that doesn t have to be repaid. Institutions crave this type of stock it provides them with an over collateralised asset, with an income profile that enables them to match long-term liabilities. The demand will continue to outstrip demand even if we do see the anticipated rate rise. SHAUN ROY, KNIGHT FRANK, HEAD OF SPECIALIST PROPERTY INVESTMENT. portfolio, who simultaneously carved out a ground rent for 17 of the freehold properties to PGIM Real Estate for approximately 16 million. In doing so, this ground rent transaction can be regarded as an innovative means of providing an additional source of funds to help finance the acquisition. The demand for ground rent transactions is strong, with a wealth of institutional investors having the appetite for exposure and driving money into the market, viewing the returns as highly attractive and are ready to seek out creative opportunities. Investors non-reliant on debt to fund acquisitions, dominate the ground rent market, with their ability to execute transactions swiftly. The hotel ground rent market will continue to evolve, albeit going forward the level of transactional activity will be dependent upon the ability to create suitable hotel ground rents, which appeal to both the institutional investor and the operator. The ground rent market, however, is not without its trepidations, with concern that in a latter stage of the investment cycle, the operator could become over exposed in terms of its debt commitment, particularly given the cyclical nature of the hotel trading environment. 7

8 Solid growth in the average value per room transacted across the UK In London, despite, the decline in transaction volume, during 217 the average value per room surged by 45% to 372, per room (excludes developments), but by a more modest 18% growth to 293, per room when excluding the Grosvenor House transaction, which sold at 1.2 million per room. With the exception of vacant possession sales, all investment structures achieved respectable growth. In particular, iconic investment deals, both in terms of long lease and variable lease structures contributed to significant movement in the average value per room. One such example was the sale and subsequent leaseback of the Park Plaza London Waterloo, which released 65% of the asset s value, resulting in a strong surge in the value per room, transacting at 327, per room. Meanwhile, South Place Hotel operating under a variable lease structure, transacted at a premium price of 837,5 per bedroom, driven by the significant revenues generated by its multiple restaurant and bar outlets. FIGURE 7 Average price per room transacted 217 v 216 by investment structure London ( ) IN REGIONAL UK, THE AVERAGE TRANSACTION VALUE PER ROOM SURGED TO 17,, A ROBUST 25% GROWTH average price per room 45, 4, 35, 3, 25, 2, 15, 1, 5, 216 Franchised 217 % change in value Fixed Lease Variable Lease Long Leasehold Managed Vacant Possession Note: Variable Lease Average Value per Room excludes the sale of the Grosvenor House, A JW Marriott Hotel All Asset Types 1% 8% 6% 4% 2% % -2% -4% % Change in value FIGURE 8 Average price per room transacted 217 v 216 by investment structure regional UK ( ) % change in value 16, 6% 14, 5% average price per room 12, 1, 8, 6, 4, 2, Franchised Managed Managed / Franchised Vacant Possession Ground Lease Fixed Lease All Asset Types 4% 3% 2% 1% % -1% -2% -3% -4% % Change in value The Courtyard by Marriott Edinburgh (M&G Real Estate) Note: Variable Lease Average Value per Room excludes the sale of the Grosvenor House, A JW Marriott Hotel 8

9 UK HOTEL CAPITAL MARKETS 218 Finally, a number of full-service, luxury and upscale hotels, transacted, resulting in a strong growth in the average value per room for franchised properties, such as the sale of the DoubleTree by Hilton Westminster Hotel, which sold for 413, per bedroom. In regional UK, the average transaction value per room surged to 17,, a robust 25% growth. Hotels operating under a management agreement, (including properties also operated under a franchise agreement) achieved significant uplift in the average value per room, albeit, this was due to a much greater proportion of assets transacting in the four-star, full service market, compared to the previous year. The sale of the 79-room Hilton Birmingham Metropole, the largest hotel by number of bedrooms in the provincial UK market, further helped boost the average value per room. On an average value per room basis, based upon transaction activity over 25 million, Manchester was the highest scoring city at 167, per room, followed by Birmingham at 136, per room and Stansted Airport was ranked third (at 135, per room), boosted by the 48.3 million sale of the Hampton by Hilton. Due to the spread of assets transacting in Edinburgh across all market sectors, the average value per room was considerably lower than other prime destinations at 16, per room, despite having some of the highest trading assets by price. This high level of transactional activity in regional UK, in particular the prime regional hubs, is evidence of the continued level of confidence from both overseas and domestic investors in the sustainability of the UK hotel market, both in terms of income growth and driving added value. West Midlands ranked as the most attractive region for hotel investment in 217 The West Midlands was the most liquid region in the UK in 217, recording over 35 million of transactions from some 23 deals, with 71% of the investment targeted in Birmingham. Manchester, which accounted for 6% of investment in the north-west of England, was the UK s second most attractive city with over 155 million of investments, followed by Edinburgh with over 115 million of deals transacted. The West Midlands region further consolidated its 1st position, with the highest average value per room of all UK regions (excluding London), achieving an average value of 113, per room, closely followed by the north west of England, at 111, per room. Edinburgh s hotel market was most buoyant, recording a total of ten hotel transactions, followed by Birmingham and Manchester. Two of the top five hotels transacting in regional UK (on an average value per room basis) were located in Manchester, with both assets selling to overseas investors. FIGURE 9 Regional UK Hotel transactions 217 by UK region Transaction volume ( ') The Courtyard by Marriott Edinburgh (M&G Real Estate) 35, 3, 25, 2, 15, 1, 5, West Midlands Volume North West Average price per room South East South West Scotland Prime Note: Variable Lease Average Value per Room excludes the sale of the Grosvenor House, A JW Marriott Hotel East of England North East East Midlands Yorkshire & The Humber Scotland Secondary Wales UK Isles & Highlands 14, 12, 1, 8, 6, 4, 2, Average value per room transacted ( ) 9

10 Despite strong growth in new hotel supply, prime regional UK cities have continued to observe a robust trading performance. With ongoing structural opportunities outside of London, the ripple effect will continue to result in solid investment going forward in regional UK. landscape, we are optimistic the UK will remain attractive to international investors in the long-term. Despite the continued opacity over the outcome of Brexit and the political volatility that will follow, combined with government plans to force overseas investors to pay capital gains tax on commercial property from April 219, the weight of money continuing to target hotel investment is significant. Recent transactional activity is evidence that investors have confidence in the inherent structural growth of the hotel sector and with investment decisions determined by income security rather than geography alone, the strong demand for quality Investment opportunities 218 LEADING INVESTOR 217 TOTAL INVESTMENT Investment activity has been buoyant during Q1 218, continuing at a similar pace to investment levels in the second half of 217, with over a 1 billion of assets having already exchanged or completed. Portfolio transactions include Lonestar s exit from the hotel sector, with the 6m disposal of the final 23 hotels held by its Amaris Hospitality platform; and the 43m sale of SACO, the Serviced Apartment business owned by Oaktree Capital Management, comprising some 39 properties and a development pipeline of some 9 rooms. The appetite for investment in Europe as a whole remains strong and despite the increasingly intensive global competitive PRIVATE EQUITY UK INSTITUTIONAL INVESTOR OVERSEAS CORPORATE HOTELIER (excluding portfolios) UK CORPORATE HOTELIER Aprirose Real Estate PGIM REAL ESTATE HPL Properties Europoint Holdings Ltd Bowling Green Asset Management 625 million ( 143,/room) 2 million ( 66,/room) 155 million ( 251,/room) CONFIDENTIAL 23 million ( 15,/Room) LEADING UK HOTEL TRANSACTIONS BY INVESTMENT STRUCTURE ACQUISITION INVESTOR INVESTMENT LARGEST PORTFOLIO TRANSACTION Jurys Inn Portfolio Pandox & Fattal Hotel Group 8 million ( 175,/room) LARGEST SINGLE ASSET TRANSACTION LONDON Doubletree by Hilton Westminster Westmont 19 million ( 413,/room) LARGEST SINGLE ASSET TRANSACTION REGIONAL UK Holiday Inn Manchester (City Centre) Starwood Capital 54 million ( 181,/room) LARGEST FIXED LEASE TRANSACTION LONDON Novotel London City South La Salle Investment Management 64 million ( 35,/room) LARGEST FIXED LEASE TRANSACTION REGIONAL UK Portfolio of 4 Premier Inn Hotels Knight Frank Investment Management 38 million ( 112,/room) LARGEST VARIABLE LEASE TRANSACTION Grosvenor House, a JW Marriott Hotel Ashkenazy Acquisition Corp (GH Equity UK) 6 million ( 1.2m/room) 1

11 UK HOTEL CAPITAL MARKETS 218 regional UK hotels, from a diverse group of buyers is set to remain positive throughout 218. As such, transaction activity in the UK regions is set to remain robust in 218, with investment deals, led by private equity and institutional capital anticipated to continue to rise. Investment activity in London is likely to continue to remain somewhat subdued in 218, whilst the protracted Brexit negotiations continue and the impact on the wider economy remains obscured. Nevertheless, transaction activity in London will focus on prime assets, with investors, particularly from overseas, willing to pay a premium for long-term, inflation-linked investments, offering a high residual value and the security of a major global hotel operator. With positive fundamentals and evidence of a strong transactional market already in 218, there is good reason for the optimism to continue and for UK hotel investment levels to rise above the strong performance witnessed in 217. Travelodge London Tower Bridge (CCLA Investment Management) KNIGHT FRANK VIEW Sizeable portfolios offering a good base in terms of profitability and which further encompass the opportunity to add value, through margins or development potential remain in hot pursuit by investors and operators. However, add in to the equation the opportunity to acquire and package together a collection of assets, which offer the potential to carve out long-term ground rents; fixed leases or variable leases with minimum guaranteed rent structures; this is what makes the hotel sector appealing to the wider investment market. There is certain value to be added, through the creation of clean, simplistic, uniform property portfolios, which offer the potential to drive guaranteed, sustainable income in the long-term and which act as a hedge against inflation. Furthermore, with increased competition in the debt markets, from non-traditional lenders and the creation of credit funds, there is much wider availability of finance to fund customised, innovative investment deals. Both the Jurys Inn and Q Hotel portfolio transactions offered the opportunity for innovative structures on scale, albeit the challenge going forward is to find the quantum of suitable hotel stock to match this level of commercial interest. With renewed vigour by certain operators to enter into lease agreements, such as Dalata, Leonardo Hotels and StayCity, we envisage that the focus of institutional funds will shift beyond the budget sector, increasing their exposure instead to quality, full service assets, with the potential for income and capital growth. The challenge for the global hotel operator, many of whom have invested heavily in a franchise model, will be to maintain market share and brand exposure, particularly in the fragmented mid-market sector. An increase in joint venture deals between corporate investors and hoteliers willing to take leases, backed by the covenant strength of a global hotel operator is likely to become a more prominent strategy going forward. 11

12 OVERVIEW OPPORTUNITIES WHERE TO INVEST London s GOPPAR up 5.8%, driven by strong growth in the Average Room Rate. Regional UK Hotels average a Gross Operating Profit of 32% compared to 45.5% in London. Payroll costs continue to rise and equate to 24% of Total Revenue in London and 31% in Regional UK. UK hotel supply grew by 2.7% in 216 with a third of all new supply found in London. The Capital was boosted by 5, new hotel rooms. Bath, Brighton, Edinburgh, Cambridge and Belfast rank as the Top 5 cities in Knight Frank s inaugural UK Hotel Development Index. The budget hotel sector accounted for 5% of all new UK hotel supply in 216. It now represents a quarter of the UK s total hotel supply. SPRING MARKET OVERVIEW A HOTEL Philippa Goldstein Hotel Analyst +44 () philippa.goldstein@knightfrank.com HOTELS Julian Evans FRICS Head of Healthcare, Hotels & Leisure julian.evans@knightfrank.com Alex Sturgess MRICS Head of Hotel Agency +44 () alex.sturgess@knightfrank.com Henry Jackson MRICS Head of Regional UK Agency henry.jackson@knightfrank.com CAPITAL MARKETS Shaun Roy MRICS Head of Specialist Property Investment shaun.roy@knightfrank.com Front Cover Picture: The Hampton by Hilton London Stansted Airport (LGIM Real Assets) Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. RECENT MARKET-LEADING PUBLICATIONS REST ASSURED SPECIALIST PROPERTY UK HOTEL TRADING PERFORMANCE REVIEW HIGHLIGHTS (12-MONTH PERIOD SEPTEMBER-AUGUST 216/17) UK HOTEL DEVELOPMENT OPPORTUNITIES 217 HIGHLIGHTS UK HOTEL & LEISURE PROPERTY 218 Important Notice Knight Frank LLP 218 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members names. Specialist Property Report Trading Performance Review Hotel Development Opportunities 217 UK Hotel: Spring 218 Market Overview Knight Frank Research Reports are available at KnightFrank.com/Research