What trends are you currently seeing in terms of investment in the UK’s hotel sector?
I see the UK hotel sector as a very healthy sector in which to invest. In London revenue and net results are both high and remain stable, while in most provincial markets these are increasing. The lower value of the British Pound is stimulating domestic, as well as foreign, demand in the hospitality sector. Also, despite the Brexit vote, the UK economy is currently stable and even showing some positive signs.
There is another trend which makes hotels an interesting asset class. Oddly this trend is growth in rental values in offices and residential properties. As a result of this growth in rental values, it is becoming more attractive for a developer to build offices or residential properties rather than hotels. Because these new offices and residential properties are expected to generate higher land values than hotels, fewer new hotels will be built over the coming years. This should also help the profitability of the hotel sector. If fewer new hotels are built, the risk that hotel markets get overbuilt will be reduced making existing hotel assets more interesting investments.
How would a possible interest rate rise affect investment in hotels?
Rising interest rates usually come hand in hand with inflation. It is a generally agreed that inflation is on the rise. Higher inflation has a mixed impact on hotels, as costs usually rise faster than revenue; which tends to make hotels less profitable. In such a situation it is wise to invest in limited service hotels, such as budget hotels and extended-stay hotels.
Staff costs are the largest cost component for hotels, they are also the most influenced by inflation. Hotels which offer limited services and therefore can be a run with a smaller number of staff, will be the least affected by inflation, and are likely to be the most profitable.
What do you see as the hot spots for growth in the sector?
Since 2008 we have been very active in the UK, rolling out the extended stay hotel concept throughout the country. The fundamentals of the extended stay property market remain positive as, in our view, the supply of extended-stay hotel properties remains low, but demand seems set to remain at or near current levels for the foreseeable future.
The UK extended stay market is still nascent – the market for extended stay hotels or serviced apartments represents 3.1% (Savills 2016) of the total room stock, whereas in the US this figure is approximately 8%. All trends show that demand for serviced apartments and extended-stay hotels of all types, will continue to grow. The market is showing a growth pattern which mirrors what happened in the USA two decades ago, where this segment of hotels has shown exceptional and continued growth.