LONDON—The United Kingdom is booming as far as the hotel pipeline is concerned.
Michael Hirst, a consultant at CBRE Hotels, said the U.K. pipeline comprises 15,642 rooms in 146 hotels, which is “the most in Europe.” Opportunities are still ahead despite an expected malaise from the 23 June Brexit vote, according to speakers on the “Opportunities in the U.K.” panel at the Hotel Investment Conference Europe.
But there was some dissent on where the best opportunities will be found, and that depends on the businesses’ investment, operational and holding models, panelists said.
“It is relatively benign across the whole county, as it always is before the storm,” said David Michels, chairman of asset-management firm and advisor Michels & Taylor.
“If you cannot get a starter now, when could you?” he asked, citing low interest rates as the reason hotels are still making money.
Charles Human, managing director of HVS Hodges Ward Elliott, said there’s equal good news and bad news.
“The regional market is very positive, but we all know London is down, with revenue per available room down by about 3% … and transactions volume is significantly down,” Human said.
Michels said he thinks hotels generally are overpriced, “and interest rates in 10 years will not be what they are today.” He added London RevPAR is down due to the glut of “budget rooms around its periphery” but that’s no criticism of the segment.
Human said he has seen asset prices escalate despite the many challenges facing the industry.
“Values are up across the board this year, profit-driven,” he said, “but cap rates have pushed up despite the uncertainty, and top-line performance has more than increased.”
Stewart Campbell, managing director of Redefine|BDL Hotels—which has 46 assets in operation or in its pipeline across the U.K.—said he has noticed a wider discrepancy in the regional U.K.
“There are some good pockets, and some disasters,” Campbell said. “Sweet spots are out there as long as the developer and operator are aligned, and a good bank is backing it.”
Human added that “the big question for yields is where interest rates go.”
Surinder Arora, founder and chairman of Arora Hotels, said performance numbers have improved due to exchange rates.
“The U.K. is safe, and it’s good if you are prepared to work hard,” he said.
Arora typically concentrates on airport properties, but its latest asset is an InterContinental Hotels-flagged asset next to London’s O2 Arena.
Campbell—who in 2019 plans to open an Aloft and a Hilton in Aberdeen—said it is encouraging to see so much public sector investment with senior debt.
“It is a good time to be financing and looking at supply in what you consider underdeveloped locations,” he said.
Money’s direction
Human said one difference between this year and 2015 is that capital coming into the U.K. has not been from private equity funds.
“There is Asian interest, not just in London, and also more domestic capital, which is a trend across Europe,” he said. “And there’s been no Qatari investment this year, I believe, perhaps because of the low oil price.”
He said that he also has seen “more institutional demand for fixed-term leases, but there still is an aversion to them from hotel companies, so it’s hard to see hotel companies changing their stance.”
Michels was more critical.
“Leases are sensible only for lessors (and are) fundamentally poor over time and dangerous,” he said. “History has proved that.”
Brexit
Some panelists viewed the 23 June Brexit vote as a factor in investor trepidation, while others saw it as an excuse.
“The pricing expectation gap has probably increased since Brexit, which might be an excuse,” Campbell said. “We’re looking more at Poland and Germany, so that will be leases. The problem is that hotels are operational businesses and you have to look at what remains profitable.”
Michels said it’s still too early to know what the lessons of Brexit will be.
“We always wait five years to find out what we didn’t know,” he said. “Change is good, and this is how hotels survive, by adapting. No one has ever left the EU, so they will learn something no one has learned.”
He also agreed with Arora that it is a blessing the U.K. has not adopted the euro.
Aurora said “to take the pain (of Brexit) now, for our grandchildren, is the right thing,” and Campbell agreed, noting that Brexit has resulted in “short-term positivity because of disposable income … we have to get the free movement of labor right.”
But since the June referendum, £400 million ($492 million) worth of London hotels have changed hands, Human said.
“There remains strong appetite for London real estate, especially from Asia,” he said. “London is still the most invested-in market. Over the last five years, on average it is 20% down, but there is growth still, and I see no stress.”
Michels said the way forward means buying existing stock, because building new assets at the moment is folly.
“There are always exceptions to make money—a clever concept, the right boutique hotel in Mayfair—but generally, would I be building new hotel stock now? Absolutely not,” he said.
Other worries
Panelists listed other challenges inherent to the U.K.:
- Staffing—By the year 2030, predictions show the U.K. hotel industry will need a million new employees, and Brexit might make acquiring staff more difficult.
- Apprenticeships—Set up by government, an apprenticeship scheme, which will become law next spring, will impose a levy on all businesses.
- Quality—London still has a supply of poor-quality stock charging high rates.
- Airport expansion—The much-delayed decision on which London airport will be expanded might be delayed further since it is a political hot potato, panelists said, and serious infrastructure projects are suddenly far more necessary after the Brexit decision.