Regional hotels and retail warehouses to come under inward yield pressure in coming months

UK regional hotels and retail warehouses are the asset classes most likely to experience inward pressure on prime yields in the coming months, according to new analysis from Savills.

Based on the firm’s latest Market in Minutes report, prime yields across all sectors didn’t experience any change in April compared to the previous month, but regional hotel yields are the most liable to harden in the near future.

Despite total investment into commercial property last year being 4.8% down on 2017, the hotels sector bucked the trend and reported volumes of £7.8 billion in 2018, a 45% increase on 2017.

The appetite for hotels, in particular the leased/institutional segment of the market, is what is causing the downwards pressure on yields. Savills notes that investor appetite in the sector is being sustained by robust operational performance in some markets with revenues per available room (RevPAR) up 3.1% year-on-year in Q1 19 with the regions seeing 1.4% growth according to STR.

Marie Hickey, director of commercial research at Savills, explains:

“UK hotels have enjoyed a strong couple of years in terms of investment as the sector has shifted to become a mainstream asset class with a broader investor pool. The underlying fundamentals of the sector remain attractive. As with the retail sector the shifts in consumer spending are having a direct impact on hotel demand, albeit in this instance in a largely positive way as spending on holiday accommodation has increased 61% since 2009.”

UK hotel investment volumes in the first quarter of 2019 rose a modest 2.7% year-on-year increase during Q1, according to Savills data, boosted by the c.£1bn acquisition of the Grange portfolio by Queensgate Investments, albeit deal count is down. This appetite for hotels, in particular in the leased/institutional part of the market, is generating downward pressure on prime yields.

Key to this investor appetite are the fundamental drivers supporting operational performance. International visitor arrivals to the UK peaked at 39.3 million in 2017, boosted by the weaker Pound, 15.5% above the pre-GFC 2007 peak. While provisional figures for 2018 point to a 3.5% softening, Q4 numbers were up 1.4% year-on-year. Even with this apparent softening in international tourist arrivals hotel operational performance, as measured by revenues per available room (RevPAR), continued to report growth in 2018 with London up 3.1% and the regions reporting a 1.4% growth. For London, this growth has continued into 2019 with Q1 2019 RevPAR up 3.6% year-on-year, according to Savills.

In the regions, performance has become more mixed with the more corporate reliant markets, particularly those that have seen significant stock growth, reporting RevPAR softening as Brexit concerns temper corporate travel budgets.

For London and the stronger destination regional cities the continued growth in operational performance highlights that it is not just international visitors that are driving demand. Domestic leisure demand is also supporting growth. UK household

spend on holiday accommodation in the UK has increased 61%, inflation adjusted, since 2009 primarily driven by the under 30’s and over 50’s.

Marie Hickey, director of commercial research at Savills, explains:

“As seen with the retail sector the shifts in consumer spending are having a direct impact on hotel demand, albeit in this instance the impact is largely positive. However, profitability challenges, particularly in terms of staff availability and in turn wage growth, plus the scale of the development pipeline seen in some markets, are generating issues for operators and investors. Understanding these nuances is key as not all hotels are created equal.”

james.wallace@realassetmedia.com