Following the Omicron set-back last winter, UK hotels have had a largely positive 2022 from a revenue perspective, with domestic demand staying strong and international visitors gradually returning. By September 2022, annual UK Revenue Per Available Room (RevPAR) had surpassed pre-pandemic highs, with many domestic-focused markets seeing considerable growth in Average Daily Rate (ADR). Occupancy is still recovering in international-oriented cities like London, but stand out markets for 2022 include Norwich, Plymouth and York. There remains optimism about long term hotel demand, supported by international travel forecasts and consumer spending habits.
However, 2022 saw ‘top line’ growth accompanied by operating cost increases, putting pressure on operators’ profit margins. Key challenges for hotel operators remain inflation across all operating departments and utility costs. The business rates revaluation, coming into effect in April 2023, will provide some respite in most areas of the UK, but 2023 will be another testing year for many operators. There appears to be strong pent up guest demand for travel but a recession looms, cost of living difficulties will linger and public sector industrial action threatens further disruption.
Turning to the hotel investment market, UK hotel transactions totalled £3 billion in 2022, which is 27.5% lower than in 2021. This was largely as a result of slowing activity in the second half of the year, connected to rising debt costs and a weakening economic outlook. This rising uncertainty has also placed upward pressure on prime yields, particularly on core leased London hotels. Regional (non-London) activity proved to be relatively more resilient, driven by the staycation market, with year-end volumes of £2 billion, down 2.1% YoY.
Notable deals in 2022 include Tristan Capital Partners’ acquisition of Point A Hotels from Raag Hotels for approximately £420m, Fortress Investment Group’s acquisition of Prem Group and KSL Capital Partners acquisition of The Pig Hotels Group from Home Grown Hotels (both off-the-market letter deals for an undisclosed price). These platforms all offer significant scope for expansion and sit in the highest performing and most resilient segments in our industry.
While the second half of 2022 was challenging in terms of transactional activity, we are seeing stability starting to return to the market as we begin the new year. We have left a decade long period of historically low interest rates, and investors and lenders alike will need to adjust to a new higher debt cost environment. It may be that more expensive debt is the key driver for hotel sales during 2023 and these opportunities will be met by investors looking to deploy capital into attractive properties or portfolios.
