Chambers UK Guide 2020: Hotels & Leisure Sector Overview
written by Laura Wild (Partner, Real Estate and Global Co-Head of the BCLP Hotels and Hospitality Team) and Emily Mickle (Associate, Real Estate and Hotels and Hospitality)
Hotel Investment SummaryDespite seeing some of the largest ever deals in the UK hotel sector in 2019, investment into the UK hotel market actually decreased in 2019 by 17% year on year in the most part due to a decrease in business confidence, both locally and overseas, which is directly linked to Brexit and the general election. Lack of supply and a wider pool of investors were also contributing factors to this reduction.
While investment during 2019 fell, there has been an increasing trend overall in hotel investment over recent years proving the hotel market’s resilience. With the focus of real estate investment being on income return, ‘alternative’ sectors like hotel assets are progressively becoming of interest to more and more investor categories, with a lot of demand originating from overseas investors.
Performance in 2019 was driven by several large hotel portfolio acquisitions. However, Knight Frank reports in its UK Hotel Trading Performance Review (2019) that 2019 brought a number of “new room openings and the sector has remained resilient driven by strong inbound tourism demand, the growth in staycation and more frequent, short-stay leisure trips.”
The outlook for 2020 looks positive following the certainty from the general election results that is sure to re-ignite business confidence in the hotel & leisure sector. Supply is also on the up with some 28,000 new hotel rooms that are currently under construction in the UK and due to open during 2020, equating to a 4.2% increase in supply (Knight Frank UK Hotel Capital Markets Investment Review 2020).
Savills expects that we will see around £1.5bn transact in London during the first quarter of 2020 and more stock coming into the market across all grades of accommodation but primarily driven by demand for budget and four-star offerings (Savills News: Investment into London hotel set for record 2020). Investors are expected to become more confident following the recent political uncertainty, leading to a recovery in hotel investment. However, as the next Brexit milestone approaches we may see caution from investors return.
Portfolio acquisitions were again a strong feature within the hotel sector in 2019 as well as key single assets being sold throughout the year.
Significant portfolio deals during 2019 included the Grange Hotel Portfolio, consisting of four hotels in central London, which was acquired by Queensgate Investments for c.£1bn; the acquisition by DTP Infinities Corporation of 17 InterContinental Hotels Group, Marriott and Hilton hotels for a reported £450m (known as Project Mauve); and the acquisition of the Hallmark Portfolio (£250m) consisting of 26 properties by a consortium including an Israeli investment fund and LGH Hotels Management.
Key single asset deals included the acquisition of The Crowne Plaza Kensington by a Singapore consortium led by Heeton Holdings for £83m; asset managers Schroders’ acquisition on behalf of the BAE Pension Fund and Immobilien Europa Direkt joint venture of the Sofitel London Gatwick (£150m); and the acquisition of Harrington Hall Hotel (c.£125m) by a joint venture of pension delivery organisation APG and real estate company London Central Portfolio.
Emerging Hospitality Trends
Food & Beverage – Food & beverage remains a challenging revenue department for hotel operators, who have started to adopt alternative strategies such as outsourcing their food & beverage operations to established brands or seeking consultancy input from celebrity chefs to provide more unique restaurant offerings. Recent hotel openings such as The Ned hotel in London contain a number of different restaurant types within the hotel, offering a variety of choice to both guests and non-hotel guests.
Food halls are increasing in numbers in Europe and the US, providing multiple authentic, quality offerings with a variety of price points. This is particularly attractive for new entrants to the restaurant market, as chefs can build a following and avoid the expensive start-up costs associated with a standalone restaurant.
One of the most interesting food & beverage trends is the food delivery market, which has seen an 18% growth between 2018-19 and is currently valued at £8.4bn, according to the MCA’s UK Foodservice Delivery Market Report 2019/20. This trend is only set to continue as these platforms disrupt the food & beverage market. “Dark kitchens”, where a number of workspaces in warehouse kitchens allow eateries to prepare meals serving delivery customers, have been set up throughout the UK. Start-ups and existing operators are expanding into new geographical areas by using dark kitchens to offer new brands and avoid high labour and rental costs associated with physical restaurant space.
Sustainability – The hotel & leisure industry is having to step up its sensitivity to environmental issues, given its high energy and water consumption and use of consumable goods. Sustainability has quickly become a key concern for hotel guests and the industry is responding to this. Policies and practices have been put into place in order to recycle, prevent waste, reduce energy use and lower carbon footprints. We are seeing a focus on kitchens sourcing local and seasonal produce and the elimination of unnecessary plastic use in hotel rooms. Most of the hotel operators have incorporated a degree of sustainability into their brand standards and we expect this to continue as the hotel industry continues to work towards securing a carbon-neutral future.
GDPR – The General Data Protection Regulation (“GDPR”) created a considerable stir in 2018, with much being written about its burdensome requirements and high fines. For the hotel and leisure sector, respecting the privacy of guests is commonplace, though some of the ways in which services are evolving will need some careful consideration in order to maintain this culture and meet the current stringent legal requirements.Now that the GDPR has been in force for more than a year we are starting to see enforcement action by data protection regulators, including in the UK, France, Germany, Greece and others. This applies across all sectors and is not just an issue for organisations which hold large volumes of personal data. As well as regulators, investors are increasingly concerned to probe the compliance efforts of potential targets and assess risk posed by any deficiencies identified in the due diligence process.