It’s an uncertain time for the UK hotel market. After seven years of solid performance, revenue per available room (RevPAR) growth is decelerating and costs are mounting. Delivering profit growth, upon which many previous investment and lending decisions have been based, appears increasingly challenging.
At AlixPartners, we believe that the signs point to the UK hotel market reaching a cyclical valuation high and that an increasing amount of restructuring is on the horizon. But how have we reached this point, and what should investors, lenders and operators do?
The story so far – exceptional growth
In 2012 the hotel sector began a period of exceptional year-on-year RevPAR growth. This peaked in 2015, when London and the regions reported 10% and 17% increases respectively.
While growth hasn’t hit these heady heights since, it has continued, with a further bump in 2017, when a weakened post-Brexit pound bolstered domestic and overseas visits to UK hotels, especially in London. In a sector that historically tracks GDP growth, seven years of virtually uninterrupted top line growth is exceptional.
“Strong performance over several years and a significant increase in quality, has resulted in hotels – traditionally considered an alternative asset class – becoming attractive to swathes of institutional investors.”
- Graeme Smith, Managing Director, AlixPartners
Valuations driven to a cyclical high?
Since the credit crisis in 2009 and 2010, the market has passed through several identifiable investment phases,which together may point to an approaching valuation peak.
- Crisis Phase: extreme operational and financial stress due to a contraction in demand and 'the unavailability' of credit
- De-leveraging Phase: banks de-lever their balance sheets by disposing of hotels and other real estate assets
- Asset Management Phase: an opportunity to create value through active asset management in hotels
- Institutional Phase: lower return requirements of investors helps to further boost hotel asset values
- Financial Engineering Phase: investors become increasingly creative in structuring deals to create value
The Perfect Storm
While London continues to flourish, revenue growth in the regions has stalled. LTM RevPAR in the regions declined for the first time since 2012 in the 12 months to H1 2019. With macroeconomic uncertainty intensifying, even London faces a more sluggish growth outlook.
Hotels remain an attractive asset class and attract investment from many different groups, but transaction volumes in the UK have fallen from recent highs. If underlying profitability remains under pressure, it may become increasingly difficult to bridge the gap between market value and sellers’ valuation expectations. If these conditions continue, restructuring looks inevitable.
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