Rental growth in the UK hotel sector has slowed this year as a result of an increase in the supply of new hotel rooms, research from GVA and STR reveals.

Hotel investment volumes

Revenue per available room (RevPAR) in the UK’s regions rose 2% from January to the end of August 2018, compared with 3.8% for the whole of 2017. After a poor September, London’s RevPAR growth was 0.7% in the same period, compared with 4.4% in 2017.

In some locations, RevPAR declined. Hotels around Heathrow airport saw a 0.6% fall in RevPAR in the year to the end of August, for example. Supply there has grown by more than 15% since 2014 and 3,107 more rooms are expected to arrive by 2020. Bristol, Belfast, Manchester and Edinburgh also experienced falls in RevPAR as new supply came on stream.

In Belfast, RevPAR fell 1.9% as the number of rooms available in the city increased by nearly 20%, says Ian Elliott, a senior director in GVA’s hotels and leisure team. “We’re starting to see a drop-off and impact in that market already,” he adds.

The wider hotel market has not been helped by a 6% fall in the number of foreign visits to the UK in the first half of 2018, according to the Office for National Statistics.

Despite the slowdown in rental growth, the investment market has gone from strength to strength, particularly in the regions. “Yes, there are problems in the market, principally associated with cost pressures, and there are new supply concerns,” says GVA director Richard Gaunt. “But that hasn’t led to any dampening of transaction and investment volumes, which are probably going to break [those of] 2015 by the end of this year.”

The continued buoyancy of the market is partly down to the number of US private equity investors that bought hotel portfolios five years ago and are now selling them. “The idea was to pick up slightly distressed assets and reposition, reconfigure and then release them, and gain in an improving market,” says GVA director Jonathan Critchley. “Thus far, a majority of those US equity funds have been very successful in that strategy.”

In May, Lone Star sold 25 hotels from its Amaris Hospitality portfolio for £600m. In the same month, Starwood Capital sold 13 hotels from its Principal Portfolio for £858m.