MANCHESTER, England — Hotel owners in the United Kingdom are looking to be more creative with their deals strategy and portfolio growth while keeping flexibility for exiting properties.
U.K. hotels are showing renewed growth thanks to solid fundamentals, but many investors and sellers are playing a game of “let’s wait and see,” especially considering continued central bank reticence on lowering interest rates too far and too soon.
At the Annual Hospitality Conference, Jacob Rasin, senior vice president of transactions at Pandox, said he is part of that patient group of investors, despite his firm having acquired operating assets in the U.K. in 2022. On a panel titled “Capital talks: Charting a fresh course for the United Kingdom market,” he said capital markets could have been more robust and much activity in the market is opportunistic.
“Trading was short-term and plateauing, and [Pandox] needed to do this without financing and with a good operating partner,” he said.
In August, Pandox acquired three London aparthotels from Starwood Capital that are operated by Axiom Hospitality.
“We instantly fell in love with Axiom, and we asked them, do you want to scale? We now have nine hotels with them, but to get cash to do that, we needed to sell,” he said. “But how? In Montreal, we have two hotels, so strategically we said, either we grow in North America, or we exit.
“We exited, but it took two and a half years to sell them. That was bit of a relay race, waiting for the money to come in, but it worked out well, and it kept us from being bored.”
The U.K.’s mini budget in September 2022 under the brief term of former Prime Minister Liz Truss knocked the industry back several pegs, said Louise Burney, operational real estate sector lead at Legal & General Investment Management. She added that might have been the starting point for the “let’s wait and see” period.
“It is a matter of waiting for the right stock. We’ve invested more than £500 million this year across all asset classes, but investing it in hospitality has been difficult,” Burney said.
Competition has forced hotel buyers to put their heads above the parapets.
“Before, we tried to be under the radar. Now, we need partnerships with operators,” Rasin said, adding that Pandox also bought hotels in Stockholm and Brussels, where there was a little less competition.
Puneet Kanuga, chief investment officer at EQ Group, said his operating firm also has a few hotel portfolios. Along with Ares Management, EQ Group invested £400 million ($522 million) to acquire a 21-hotel portfolio in the U.K. from Landsec in May.
“We liked the diversity of the portfolio, which include the fourth-biggest [meetings, incentives, conferences and exhibitions] hotel in London, a boutique hotel in another city and all in great locations in strategic markets. We collapsed the operating leases, and we were able to alter franchises,” Kanuga said.
Since acquiring the portfolio, EQ Group is assessing capital-expenditure plans and lease extensions for the hotels, he said.
Kanuga described the last few years of deal-searching as “bad news followed by bad news, followed by bad news, followed by bad news, followed by bad news, followed by a little bit of good news.”
Archer Hotel Capital also has been busy, said investment manager Alison Hargreaves. Archer sold London’s The Dilly in December 2022 to Fattal Hotel Group for £90 million.
“We always believed hugely in that asset, but it was complicated. We have concentrated our CapEx funds on the highest [return-on-investment] hotels,” Hargreaves said. “We also own both London Hoxton hotels. These have been interesting times, and we were looking for assets that did not require CapEx, which made our shareholders comfortable.”
She added Archer is interested in hotels with yields based on trailing 12 months dividends or those close to that with a good deal of upside. Archer also recently set up a hotel-management firm.
“We now operate 50% of our hotels, which allows us to exit with vacant possession,” she said.
Robert Seabrook, executive director at business advisory CBRE, said there has been £4 billion of hotel sales this year in the U.K.
“Private equity was responsible for 40% of the sales and 50% of the acquisitions. Only 30% of sales were single assets, a complete change from previous years,” Seabrook said.
Implementing ESG in hotel deals
Integrating environment, social and governance into hospitality deals continues to be taxing, Burney said.
“We are preferring relatively small portfolios. We’d want to take one asset, not three or four, and ESG is a challenge, as we need good quality products and there is a lack of stock,” she said.
Archer recognized a need to hire a full-time sustainability manager where before it worked with external experts, Hargreaves said.
“We saw the wall of work coming in her direction, and now we look at [ESG] right from the beginning of the transaction process. The first step is to have baseline data, and we have quarterly training on ESG developments,” she added.
UK outlook
Despite the consistent headaches in the market, the panelists said the future of the U.K. hotel transactions market is bright.
“The U.K. is a super-exciting market. This year, there have been a few deals at high values, and now inflation is not such an issue. The market will remain active,” EQ’s Kanuga said.
Kanuga added that private equity is able to provide debt, and banks are more willing to lend.
“Debt funds can be more competitive. The best deals were last year, but now we’re at the bottom of the cycle, and it is a good time to buy. I have been in the business for 25 years, and [the hotel industry has] always complained about something,” he said.
Institutional investors remain very happy with leases and, increasingly, with management contracts, Burney said.