Why London’s hotel market continues to outperform

Posted: 19th June 2024   |   Share

By Soraya Shamji

Soraya preferred

Read article in The Hotel Magazine

The burning question on hotel investors’ lips is: where should we conduct our business? The industry has found itself at the tail end of some significant shifts in the real estate landscape triggered by higher interest rates, tighter consumer budgets, and a technical recession in the second half of 2023. These factors prompt investors and lenders alike to think more strategically about their involvement in the hotel sector, with development pipelines in particular taking a hit.

What we're seeing now is the market adjusting to the new norm. Investors are opting to stick with regions where hotels have a proven track record of performing well even in the face of market headwinds.  

In this current landscape, London’s hotel market stands out as a beacon of stability, resilience, and opportunity, surpassing the performance of regional assets. While many cities across the UK struggle with visibility, London offers a consistent and predictable environment for investment, demonstrating its capacity to weather challenges and bounce back.

This is reflected in the data. London's 12-month occupancy surged by 16 percentage points to 77% by September 2023, according to Knight Frank, surpassing regional hotels, which were once known for their strength in business conferences and short weekend getaways. Although some areas are still seeing solid performance, in general regional recovery trailed behind London's, with hotel occupancies still lingering over three percentage points below 2019 levels.

Even more so, London leads the pack as the most appealing European city for hotel investment in 2024, as per a recent survey conducted by Deloitte. With deal activity quickly picking up pace, the UK's capital is cementing its status as a pivotal hub for tourism and business, along with its role as a primary gateway city for international travel.

The survey drew insights from real estate investors who found hotels to be the most attractive sector to invest in, rising by 15 percentage points since 2023. Both asset disposals and acquisitions are now top priorities for business leaders looking to London as their investment choice, with asset disposals increasing by 24 percent and acquisitions by 58 percent compared to the previous year.

This is no surprise, given that despite challenging economic conditions, proactive operators in the hotel industry have generated strong cash flows, boosting trading performance and protecting values. London particularly stands out, with a notable rebound in occupancy rates, surpassing regional UK levels for the first time since the pandemic recovery began.

In particular, London's luxury hotel landscape is growing at pace, with several upscale properties set to debut in the next few years. Notable additions include Hyde Paradox Hotel London City, Art'otel London Hoxton, Ruby Stella, and The Emory. Each promises unique experiences and sophisticated designs that appeal to London's ever-growing surge of high-net-worth visitors.

Meanwhile, newcomers like Sircle London and Six Senses London are poised to redefine luxury hospitality with innovative concepts and top-notch facilities.

The luxury market has been supporting much of the sector’s growth, with recent data from Knight Frank indicating an eight percent increase in the average daily rate (ADR), surpassing 2019 figures by an impressive 22 percent. This growth has largely been fuelled by returning international visitors and sustained demand from corporate and leisure segments.

Moreover, London's Gross Operating Profit per Available Room (GOPPAR) surged by an impressive 40 percent compared to 2022. While forecasts suggest a slightly slower pace in 2024, London remains an attractive investment destination.

There are four primary reasons why hotel investors need to be apprised of the state of the market.  First, the performance in regions other than London, driven by pent up demand following the pandemic, is showing signs of trailing off. Meanwhile, London’s status as a cultural, leisure and commercial powerhouse is difficult to unseat and adds to its enduring strength as a hotels market.  Second, some operational costs remain high, meaning that target operating models need to accommodate such realities. Third, although rates are decreasing, they remain higher than historical levels. Therefore, investors need to think ahead to how this will play into their target operating model as well as costs of funds.  Fourth, as should be clear, the market is fluid, and shifts are occurring over shorter timescales than typical financial timescales in the hotel industry, particularly refinancing. The solution is that the relationship between hoteliers and investors must be more collaborative and close, and be agile to changing market conditions. 

Breaking into this complex market is no easy feat – doing so requires patience, expertise, and a financial partner that is well-versed in the specificities of boutique and luxury hotels. Leumi UK’s dedicated hotel finance team has cultivated the experience necessary to operate effectively in what is a notoriously complex sector. Investors need to become acquainted with the hotels’ emphasis on cash flow which requires flexibly tailored facilities if projects are to succeed.

Amidst global market turbulence, London’s hotel sector will remain a promising place to do business. Its stability, reliability, and reputation as a major financial centre make it an appealing choice for investors looking to grow their capital, which is why we at Leumi UK remain bullish on the lending opportunities as well.