London Hotel Market

As with all UK property sectors, the hotel sector has certainly not escaped the general economic downturn. With a strong tourist and corporate travel dependency, London is expected to feel the full force.

Hotel investment yields remain low compared to other commercial property sectors although hotels tend to experience a 12 month lag.

Yields

Yields have risen consistently since end 2006, but this rise has been markedly less than other commercial property sectors in the UK..

This is due to continued strong trading performance of hotels, which only started to decline in Q4 2008 and will continue to do so for the remainder of the year.

Prime yields have risen, but not at the same speed as the correction seen within the wider property market.

Restrictive supply of hotel investment opportunities, driven by owners’ reluctance to bring the asset to the market, will act as a brake on yields softening too far.

Funding

The few hotel investments that are funded tend to be for hotels subject leases.

Management contracts are becoming increasingly difficult to fund. There will be money heading to quality assets. – There was a Travelodge deal in January 2009 at a 6% yield shows the attractiveness of a good covenant and a 35 year lease.

Encouragingly, there is a weight of money waiting to come in. There will also be a number of forced sales in 2009, which tend to be at significant discounts to true market value. The decline in availability of capital will ensure better deals for those with money to spend.

Opportunity

Falling investor confidence, as a result of the global economic turmoil pushed transaction levels lower last year. However, the relative weakness of Sterling also presents investment opportunity in the UK that will enhance returns for foreign investors.

Supply will reduce as the market does not present an attractive environment to bring assets for sale. This will restrict the supply of investment opportunities and will act as a brake on yields softening too far.

Hotel assets tend to be well invested to maintain trading performance providing a fully reusable asset on lease expiry.

Sterling fall, tourist increase?

The future of London as a financial centre has been called into question amidst the global turmoil. However, current events are unlikely to affect London any more than a other financial centres. Corporate travel will be affected, but will recover.

With the UK base rate now at 0.5% the lowest in their 315 year history, the value of the Pound will continue to decline. Cheaper Sterling will add value to the attractiveness of some assets for overseas investors.

Latest data shows that Sterling, compared to the Euro is 18% cheaper than a year ago. This will lend support to the London market and is the reason why the European visitors take an increasing share of the forecast for this year.

We are seeing an increase in visitor numbers to many of London’s attractions, which bodes well for hotel trade.

Source: Meridiana Research Department, May 2009