Savills - General - UK
Date: 18 Apr 2008
Savills' UK Hotel Investment report reveals that hotel investors are optimistic and values remain buoyant, whilst both rental growth and returns continue to outperform other commercial property sectors.
The research predicts that hotel growth will continue to out-perform the wider "all property" market. Philip Johnston, head of Savills hotels, comments: "The underlying fundamental of hotel trading remains strong and will underpin investment demand and performance. Total returns in the hotel market are set to move in-line with other commercial property sectors, but hotels will offer superior returns."
The research reveals that in 2007 total returns from UK hotels stabilised, whilst this year they are expected to rise to 4.2%. This is compared to other UK commercial property which had returns of -3.4% last year and a predicted figure of 1% for 2008. Rental growth, however, is predicted to slow over the next few years, but it looks set to remain positive and out-perform other commercial property sectors. The research indicates that rental growth for hotels stood at 4.7% in 2007 and this is set to drop to 4.1% this year, whilst other property was at 4.2% last year and is expected to be 3.7% this year.
The report shows that in 2007, due in part to the strength of the UK pound, visitor numbers to the UK from abroad were lower. Visitor numbers are likely to fall further this year as the US appears set to enter a recession and since visitors from the States are key to the UK hotel market (they account for 15% - 20% of visitors to the UK), the impact will soon be felt in terms of occupancy. This could be exacerbated by budget cuts at major international companies which will have a negative impact on the level of business travellers to the UK. On the other hand however, there are increasing numbers of travellers and hotel users coming from the emerging economies of Asia, hopefully counteracting the decline in the number of American visitors. The report reveals that the visitor figures for 2007 are likely to show a -2% fall from 2006, however there is set to be muted growth during 2008.
In terms of investment activity, the report indicates that despite the uncertainty of the global economy, some core investors are looking to identify investment opportunities. Adrian Archer, director of Savills hotels, comments: "2008 will mark a period of polarisation between investors, who will become split between those willing to take a risk for higher potential returns and those who would rather play it safe. Investment transaction figures last year were strong: about £3 billion UK hotels were transacted in 2007. This year the "credit crunch" is expected to take its toll, making debt for property harder to come by. However, at the moment, overall investment interest for hotels remains positive."
Yields moved out during Q3/Q4 of 2007 by as much as 50-75 percentage points, despite strong demand from owner operators and investors. Overall, the report suggests that there will be a reduced volume of transactions this year, whilst investors and operators monitor the markets and judge when to invest again. Philip Johnston continues: "With yields moving above base rates, it has become a buyers market. Sellers now have to be more realistic as yields have shifted to reflect the lack of liquidity."
The report also identifies a shortage of prime hotel assets as going concerns, for which demand remains strong. This is fuelled by good trading conditions, meaning that owner-operators and investors are not selling, or being forced to sell.
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