As a global tourist and business destination, demand for hotels in London remains strong, but more players mean more competition, and opportunities to acquire existing hotels are limited.
While domestic investors, at 76 percent, continue to dominate investment in the Capital’s hotels, their Asian peers accounted for 17 percent in the first nine months of 2018, compared to 4 percent at the same point last year.
A weak pound is just one of the factors attracting international investors – ranging from private equity and high net worth individuals to international operators – to the sector.
And the market remains strong. London’s rising visitor numbers are keeping occupancy rates high – standing at 79.6 percent in the first half of 2018, above those in Paris, Berlin and Rome.
Average rates meanwhile stood at €160, below Paris but above other European markets.
Investors are keen to take advantage
Demand for London hotel investment has come to outweigh supply, following an impressive year for hotel transactions in 2017, with London topping the global charts at US$2.6 billion traded.
“There’s certainly an excess of demand over supply,” says Graham Craggs, Hotels & Hospitality Managing Director at JLL.
Deals such as Katara Holdings’ recent purchase of the Grosvenor House Hotel in London’s Mayfair from private U.S. real estate investment firm Ashkenazy Acquisition Corp are a rarity, says Craggs.
“Some of the most sought-after hotels in the traditional heartland of London are unlikely to trade, with their owners holding on to them for the foreseeable future,” he adds.
Investors are instead turning to less-established areas of the UK capital, as well as considering development opportunities.
Shoreditch, where the Reuben Brothers this year bought The Curtain from its developer, the City of London – the financial heart of the capital – and the Midtown area between the West End and
The City are becoming much more sought-after, Craggs says.
In such a tight market, other investors are choosing to opt for the new-build route. Asian capital was behind this year’s circa £100 million purchase of a development site at London’s Trafalgar Square. India’s Abil Group is planning to build a five-star hotel at the central location, with a management contract expected to be awarded to a hotel operator by year-end.
More development opportunities are cropping up, Craggs says. “As well as the lack of opportunity to invest elsewhere, it’s also partly because the development returns from other commercial uses such as offices or retail aren’t quite as attractive as in the past.”
And growing numbers of overnight visitors – a record 31.9 million in 2017 – need somewhere to sleep. Between January 2017 and June 2018, 62 new hotels opened, adding 8,500 rooms to the market. Around 11,000 new hotel rooms are expected to be added between now and 2020.
“There is a relatively big pipeline across the wider greater London area,” he says. “But London has been quite capable of handling and absorbing new supply.”
Although London hotel performance across key metrics including occupancy, average rate and RevPAR has dipped following a very strong 2017, it remains an attractive destination for investors, says Craggs, despite uncertainty around the UK’s exit from the European Union.
A rise in visitors from Asia, in particularly from China, is expected to fuel further demand for London hotel rooms. By 2024, Chinese visits to London are expected to reach 334,000 a year from their current level of around 200,000 according to the International Passenger Survey. Revenue per available room is also forecast to rise in 2019, although at a slower rate than 2017.
And while global investors are also looking at rival European cities it’s not to the detriment of London, Craggs says.
“There is still a lot of capital out there to be deployed and while London yields are tight, they are just as low across all major European tourist destinations,” he says.
“We expect sustained strong interest in London’s hotel sector as it outperforms other forms of real estate.”
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