UK hotel transactions top £2 billion, volumes down by 37%

£2 billion of hotel transactions were recorded in the UK in 2023, according to a new report published yesterday by Knight Frank, and overseas investors represented 39% of deal volume. Nearly a third of total annual investment activity (31%) took place in Q4, the strongest quarter of the year for investment into the sector with £615 million of deals.

Andrew Jackson, Partner, Head of Hotel Agency, Knight Frank

However, the 2023 figures do not compare favourably to past years. Despite a promising recovery in the opening months of last year, the rising cost of debt, elevated operational costs and a widening mismatch between buyer and seller price expectations all contributed to a decline in investment activity.

Total annual investment volume declined for the third consecutive year, down by 37% on the previous year and some 57% lower than the ten-year average. Excluding the Covid-impacted year of 2020, investment levels were at their lowest since 2012.

But the encouraging increase in investor activity at the end of 2023 will continue to build momentum through 2024, Knight Frank believes, with continued investor demand and a narrowing of seller vs buyer expectations, as well as possible interest rate stabilisation or even rate cuts. 

“2024 is expected to be a pivotal year”, said Henry Jackson, Partner, Head of Hotel Agency, Knight Frank. “We anticipate that with the higher yields associated with operational real estate and the living sector driving an increasing allocation of capital, hotel investment will recover at a more buoyant pace as the year progresses”.

Hotel property continues to offer value and diversification of risk, he said, “and with hotel yields stabilising and trading expected to maintain its momentum despite low economic growth forecast, we envisage a greater volume of diversified capital to be deployed into the sector in 2024.”

The UK hotel market remains one of the most liquid hotel markets and continues to appeal to overseas investors seeking to increase their exposure to the sector. Foreign investment in 2023 totalled over £760 million, 39% of the total deal volume. Activity from continental European investors recorded an annual uplift of 40% in 2023 to over £350 million, whilst capital sourced from the Middle Eastern and Asia also increased.

The first quarter of the year accounted for 29% of total annual investment, equivalent of £570 million of transactions. The challenging macroeconomic environment led to a significant reduction in investment during Q2 and Q3, and the pool of buyers restricted to mostly experienced hotel owners, HNWI and family offices seeking long-term investment opportunities, and those private equity players already with a standing in the market. These investors accounted for over 70% of the total annual investment volume.

The pickup in activity evidenced by the increased dealflow in Q4 is expected to continue as the economic picture brightens. Looking ahead, Knight Frank anticipates more assets coming to market, fuelled by an increase in funder-led pressures, limited refinancing options, fund maturity, under-invested assets with low EPC ratings and more distressed asset sales.