Last year was challenging for the UK hotel sector, albeit with some encouraging green shoots of recovery over the latter part of the year.
Occupancy levels picked up substantially over Q3 and the domestic staycation market provided a welcome boost for the industry over the year, particularly for more coastal and rural locations. This has still been insufficient to make up for the lack of international tourists, with STR hotel industry data reporting UK occupancy at 54% of 2019 levels over the first nine months of 2021. This has hampered major city centre locations, in particular those reliant on corporate demand, which have underperformed in relation to more rural destinations.
So 2021 was a year where performance was hugely polarised, with the underlying demand drivers for a location, combined with the agility of operational teams, absolutely critical in influencing individual hotel performance.
It is crucial to remember that the success of the vaccine rollout and the strength of the domestic staycation market has meant the UK’s hotel sector has still outperformed Europe as a whole. In the case of the assets we own and operate, performance last year surpassed our expectations, with the past 18 months highlighting the importance of prudent cost control and adaptability in a highly volatile macro-environment.
Our hope is that over 2022, Covid will move to becoming endemic. However, we have to acknowledge the possibility of further bumps along the road to recovery, with the pace of recovery still varying significantly across the globe. In this base case, 2022 should see some normalisation in terms of demand patterns. However, the recovery in international travel, particularly from long-haul destinations, is likely to build more gradually across 2022 and subsequent years.
While the spectre of inflation remains prominent, we think the fundamentals of the UK consumer remain in reasonable shape given the backdrop of unspent lockdown savings, low unemployment levels and pent-up demand for leisure and hospitality. This in turn should support continued demand from UK consumers, albeit with increased competition from outbound international travel. This year is unlikely to be back to normal, but we expect a sizeable step in the right direction when it comes to leisure and travel.
Given the operational headwinds caused by Covid over the past couple of years combined with ongoing challenges relating to operational costs, most notably labour and utility costs, the hotel investment market has remained in remarkably good shape. Transaction levels over 2021 were a substantial improvement on 2020 and pricing did not appear to show any Covid discount.
The sector, both those let on long leases and those where the investors’ income is tied to trading patterns, has actually seen yield compression over the year. This is reflective of a lack of stock coming to market, but also is indicative of investors looking through the short-term challenges posed by Covid and allowing the favourable tailwinds that have supported the sector in the past to reassert themselves.
As the recovery story continues to build over 2022, we expect continued investor demand for the sector. In our view, understanding the underlying location and asset fundamentals remain absolutely key to making sound investments in the sector. We believe the long-term fundamentals for the right hotel assets in the right markets are positive.
We have added to our operational hotel exposure in recent years with the acquisition of Yotel in Clerkenwell on a management agreement in 2021 and operational assets continue to be a strategic growth area for LGIM Real Assets, driven by the long-term underlying fundamentals of the sector and return potential. We continue to target existing assets or developments as well as reviewing our own portfolio to identify repurposing opportunities, such as the redevelopment of Debenhams on Princes Street, Edinburgh, into what will be an iconic hotel in the heart of one of the UK’s strongest regional cities in terms of tourist demand.
Matt Soffair is research manager for Legal & General Investment Management Real Assets