What is the outlook for corporate activity in the holiday park market?

History tells us that the leisure markets, all relatively small sectors and with limited transactional transparency, have traditionally been later to enter a downturn and later to recover, when compared to other asset classes. So while many sectors were reporting subdued levels of activity in the second half of 2022, some top-of-market deals in the holiday park market did not complete until the first three months of 2023.

The beginning of a downturn is a mis-match in buyer and seller expectations, with vendors seeking yesterday’s price while buyers have moved to a lower price level. In this case, as 2023 progressed we saw the active buyer largely comprising industry operators, who required a commercial return consistent with rising costs and riskier outcomes. Operationally, trends throughout 2023 supported the resilience of the mixed model; hire fleet bookings were strong, whereas unit sales were struggling and there was significant upward pressure on costs, particularly in staff, business rates and utilities, at a time when 2024 pitch fee increases were likely to be restricted for the majority to sub 5%, much lower than 2023. The operator consolidation which saw a spike in holiday park sale pricing had passed and, led by smaller transaction sizes, overall investment volumes were lower than both 2022 and 2021, albeit the number of transactions remained stable.

To help gauge how the sector may emerge from more subdued transaction levels, it is worth highlighting a few trends in the institutional buyer market. Whilst consolidation and the influence of private equity has been a feature of the holiday park market in recent years, according to Partners Group, the number of private equity (PE) market fund managers could shrink from in excess of 10,000 players, to as few as 100 over the next decade as a difficulty in raising new funds, increasing regulatory costs and higher interest rates drive consolidation. There has been a marked decline in private capital fundraising, particularly among smaller PE groups, and the increased cost of borrowing has impacted their ability to meet return requirements, particularly for more opportunistic capital, which typically requires an IRR (Internal Rate of Return) of around 20%. This in turn has translated to lower offers and difficulty in securing deals. The recent withdrawal of the UK Center Parcs group from the market is a case in point. Brookfield acquired the group in 2015, in a low interest low inflation environment. Given the multi-billion pound price tag the use of debt would have been used to facilitate this deal, however its increased cost in 2023 would have undermined returns, quite apart from the fact that it is essentially a mature business with fewer angles to help unlock further value.

In a market perceived to be in temporary decline, lower risk higher return opportunistic capital is actively looking to invest. These investors typically adopt a “buy and build” strategy, by assembling a new group in one or more transactions, often off market and at lower multiples, and using capital expenditure to reposition and rebrand under-invested parks whilst developing new pitches. Amongst these we are seeing private equity investors new to the holiday park sector, who have divested in the hotel sector and therefore appraise holiday parks with a hotel set of eyes and expectations; albeit there is limited availability of the benchmarking data and trading metrics they are used to.

For institutional capital already in the sector, some are seeking one-off acquisitions for additional scale, as part of their traditional five year hold strategy. Operational markets continue to be perceived as an inflation hedge and sound home for capital, especially given the structural changes seen in the office and retail markets. The UK holiday park sector continues to generate interest from overseas money, particularly from the US, given the cheap pound and relative multiples on profit.

Much of the corporate community has however pressed the pause button and any change in corporate activity is likely to follow the shape of the interest rate curve and the cost and availability of debt relative to other operational markets. An easing in the cost of living crisis and an increase in unit sales and absorption rates will be key to corporate buyers being able to deliver their business plans. The supply of suitable buying opportunities will to some extent depend on whether the upcoming wave of refinancing creates either bank-led sale processes or an opportunity to step in and provide alternative debt solutions. A number of private equity groups are in the course of raising funds, aimed at distressed assets, although there have historically been few such instances in the holiday park sector.

For some private equity investors already in the sector, who bought in the post Covid bull market supported by the staycation effect, the inability to travel and unspent savings, exiting to realise a significant loss is not a feasible option. Given that there is little medium term prospect of a renewed low interest rate/high multiple and higher profit environment, it is difficult to foresee a return to 2021 levels of activity or pricing, and these groups will probably seek to hold and operate pending suitable conditions for a strategic sale.

For those operators seeking backing from inbound private equity, there are reasons to remain positive. The holiday park sector remains fundamentally fragmented. In due course it is likely that there will be consolidation among the second tier of operators. A holiday park group of perhaps three to five assets, which is family owned and operated and looking to grow, is likely to prove attractive to the institutional investor seeking to buy, build and reposition a new group of scale. Looking longer term, as the private equity market itself becomes more consolidated, this may lead towards a market comprising both a small number of dominant PE backed groups of scale, and single asset owner operators, with fewer mid-sized operators.

A mature scenario for the UK holiday park market is likely to see the exit of high return opportunistic private equity investors, who may start chasing other geographies in mainland Europe in the same way as has happened in the hotel sector, and the establishment of stable lower multiple private equity investor operators. Certainly for the foreseeable future however, by virtue of its defensive investment qualities, the UK holiday park market continues to sit firmly on the institutional map, as a true Cinderella story.