Shifts in the mainstream property investment market due to political and economic uncertainties have seen a change in the types of properties that investors - particularly international investors - are looking to in the UK. One of the most popular (and it seems financially secure) options for these overseas investors is hotel rooms.
Hotel room investment isn't a new phenomenon, and many investors have been taking advantage of these alternative opportunities for decades. It's not been until recent years however, especially with the impact from Brexit, that investors have been looking to this sector for higher yields and more security from their purchases. Particularly in London (as reported by Christie & Co,'s recent research), hotels gained investors yields of between 3.5% and 7.5% net in the first half of 2019, which is only continuing to grow into 2020.
"An increasing sophistication of the type of operations and covenants available in the alternative sectors and more attractive returns has also increased the appetite...
...There have also been challenges in the high street retail sector and this has displaced some traditional investors into the alternative sector," said Darren Bond of Christie & Co.
The most attractive alternative investment options in the UK right now are the hotel and healthcare sectors. "Both have strong investment pedigrees and receive the greatest level of appetite," explains Bond. "There is a pool of sophisticated investors who have been investing in these markets for many years. The attraction of leases to strong domestic, market-listed or global covenants provides secure income over 25- to 35-year terms."
With the ability to easily invest in just one room at a hotel, this sector offers more scope for starter-investors to get onto the investment ladder, with prices of these singular rooms - much like student accommodation - offering opportunities for purchasing at much smaller amounts. Hotels are also considered one of the most low-risk investment options for many investors. With many opportunities offering investors the chance to become part of a large, established chain with an exemplary track record, investors are able to gain a fully hands-off income generator with peace of mind that these companies will not fold.
In a recent report by Christie & Co., it was found that many of the investors now looking to hotels as an alternative investment option came from the local domestic market, however investments from funds are on the rise, especially internationally.
"The UK is still considered to be an attractive market to invest [in]. The cost of borrowing remains at an all-time low and the drop in the value of sterling has made prices more attractive to overseas investors. Any potential fallout from Brexit will take a period of time to unravel and, for now, investors still have to place capital. In short, business will continue in the short term. There has been some strengthening in some European markets as a result of Brexit, and the German investment market, for example, has seen continued yield compression as investors seek a market for their capital" - Darren Bond, managing director of capital markets at Christie & Co.
By September 2019, investment into the UK hotels sector has reached £3.22 billion - according to research from Savills - and whilst this is a marginal decrease on the amount for the same period in 2018, over the last decade there has still been an increase of 11.3% in this sector. The majority of this investment into hotels was seen in London, with some £1.98 billion invested. Other regional areas followed - the north saw £465 million invested; the south east, £430 million; Scotland, £225 million; and the south west, £110 million.
Rob Stapleton, director in the hotels team at Savills, comments: "Deal volume this year had undoubtedly been affected by global political uncertainty and wider global macro issues. The UK's hotels are seen as a relative safe haven for overseas investors, illustrated by the rise in capital from Asia Pacific. We have seen a flight to quality with investors following London assets in particular. This trend is expected to contine and whilst the UK's regional markets have seen lower transaction volumes so far this year, we expect the ripple-effect of historically low yields in London to encourage investors into the more stable regional markets in the search for yield. Volatility in the equity markets and the spread between gilts and equivalent hotel yields remain attractive however, and we expect investment into real estate, and in hotels in particular, to remain an attractive option for investors from across the globe."
In 2016, it was considered that luxury hotels were the most secure investment option in this sector, however in recent months we have seen a shift - partly due to the growing popularity of Airbnb - to boutique and 'lifestyle' hotels.
According to Statista, the number of tourists looking for these types of accommodation over the traditional four- or five-star hotel was on the rise. International tourism in the UK has also been on the rise since the referendum, according to the UNWTO World Tourism Barometer, which reported that the UK has seen a rise in tourism of 7% since 2017, and this would continue to rise into 2020. There's been a recent shift in tourism coming into the UK for a number of reasons, including: the appeal of travel to the young generations; a growth in wealth of Chinese nationals; and the upsurge of the silver economy - and these show no signs of changing any time soon!
Interested in hotel investment? Get in touch with our Sourcing Team today on 0161 3026732 to enquire about our current opportunities or for help sourcing your perfect investment option.