Commercial real estate weathered a turbulent 2023 against a challenging economic backdrop, with the rising cost of debt and increase in interest rates prompting investors to exercise caution.

Robert Stapleton

Robert Stapleton

Nevertheless, the continued value placed on travel and experiences led to increased hotel occupancy, attracting the attention of investors looking for a safe hedge against inflation.

In 2023, transactional volumes for UK hotels reached £2.8bn, down on the five-year average of £3.2bn. Despite the more muted activity, the figure still represents significant investment. Notably, many of these transactions took place in Q4, indicative of improving investor sentiment and painting a positive outlook for the year ahead. Based on the current pipeline, we forecast £4bn worth of UK hotel transactions over the next 12 months.

Interest rate rises have been detrimental to the wider commercial real estate market during 2023 and hampered buyers’ ability to pay high asking prices. As rates stabilised, the bid-ask spread has narrowed, allowing for values to stabilise and igniting more confidence in the market. Global investors have been more reticent to invest with the uncertainty surrounding the UK market, but global players, particularly from south-east Asia and the US, are likely to invest more heavily in hotels throughout the year, as well as European institutions and private capital.

Pressure from private equity funds to deploy capital is already evident, with big platforms set to come to market throughout the year. As debt remains difficult to secure, more creative transactions will be seen, with more mergers and acquisition activity and refinancings as loans reach maturity.

For those travelling outside UK cities, they now tend to seek unique and immersive experiences, driving the demand for boutique and ‘lifestyle’ hotels. These establishments often emphasise local culture, design and personalised services. Investors are recognising the potential of these niche markets, leading to an increased number of transactions involving boutique hotels.

In terms of inner-city stays, there has been an increase in ‘pod’ or micro hotels, which will continue in 2024. They offer good-quality services at a low price for travellers and our research reveals that a London pod hotel room can be up to 22% cheaper than a traditional budget hotel in the same area. Recent examples of activity in this market include Melford Capital’s conversion of London’s SoHostel, comprising 775 capsule beds and a large roof terrace. Similarly, Kabannas now has a new micro accommodation capsule platform recently backed by €200m of funding.

Nine offices have also converted to hotels in the past year, and this trend is expected to continue for the first half of 2024, primarily in London but also stretching into cities across other regions in the UK. One example would be the recent Haymarket House in central London, which was purchased by Criterion Capital this year and is expected to go through an office-to-hotel conversion.

The City of London’s planning policy has softened to allow vacant offices to go through a repositioning, which is more common in the US and helps to assist the circulation of stock in the market.

It’s no surprise that the hotel sector remains resilient in the face of uncertainty, and it’s positive to see it bouncing back from the negative impact of the pandemic. Hotels are the second-oldest asset class after residential – and consumers continue to seek a home away from home to visit new places, friends and family. Investment into the UK market will get back to its five-year average, and it will be interesting to see how it performs in 2024.

Robert Stapleton is director for hotel capital markets at Savills