Despite the ending of the UK’s lockdown restrictions and the easing of COVID-19 rules in other countries, international travel still remains a more difficult proposition than it was pre-pandemic. Whether it’s vaccine certificates, the need to isolate on arrival or the need to produce a negative test before travelling, going abroad on holiday these days is a more complicated, and sometimes fraught, experience.
As a result, the huge increase in domestic holidays seen during the initial stages of the pandemic has continued through 2021 and into 2022. In August 2021, UK hotel room availability for a family of four was down to just 7 per cent, according to research carried out by online booking tool Hoo. With staycationing forecast to be bigger than ever this summer, the popularity of UK hotel getaways looks set to remain strong.
It’s no huge surprise, then, (especially given the levels of distress that the sector saw early in the pandemic) that the M&A market in the UK hotel sector has been particularly active recently. In fact, insiders and analysts feel that the activity in the hotel M&A sector could be heading for growth, as opposed to simply recovering to pre-COVID levels.
Regional hotels particularly in demand
During the first half of 2021, the deals driving the recovery of the M&A market for UK hotels focused around regional locations, as opposed to hotels in the London region. Hotels throughout the North of England, in Scotland, Wales, and the South East have all been targeted as investors and strategic buyers look to cash in on the increased appetite for UK holidays.
Hoo’s research found that the greatest increase in demand for UK hotel booking was in Great Yarmouth, illustrating that traditionally quieter destinations, such as Norfolk, have become increasingly busy and popular since the pandemic hit.
Regional hotels in popular holiday locations are in demand and are also coming to market in larger numbers. Many local hotels are simply struggling to get back on their feet after long closures. Before the pandemic, they were popular hotels with steady and reliable, if seasonal, cash flow.
However, long periods of inactivity with little or no income has sapped owners’ capital reserves, leaving many owners looking to restructure or refinance, particularly where expenditure on repairs and maintenance is necessary to present their accommodation back to market. These are fantastic opportunities for investors with cash to spend.
In one of the largest hotel transactions completed outside of London in 2021, Macdonald Hotels sold two major properties - the 156-bedroom Macdonald Holyrood in Edinburgh and the 338-bedroom Macdonald Manchester Hotel - to London-based private equity firm Zetland Capital Partners. This was a strategic divestment by Macdonald Hotels, who badly needed the cash to deduce debt and upgrade the remainder of their 28-strong hotel portfolio and nine resorts.
Inn Collection Group is one of the many hotel groups that have been busy adding to its portfolio of regional hotels over the past months. Among its most recent acquisitions was the takeover of the Dower House and Spa in Knaresborough, which took its estate up to 26 sites across the North of England.
Earlier, the group had added to its portfolio the Ripon Spa Hotel in North Yorkshire; the Carlton Hotel in Lytham St Annes, Lancashire; the Waterhead Hotel and the Wateredge Inn in the Lake District; and the Park Hotel in Tynemouth, North Tyneside.
Following the Ripon Spa hotel deal, Inn Collection Group’s managing director, Sean Donkin, stated “The Inn Collection Group excels at revitalising classic, landmark sites like The Ripon Spa and realising their full potential with significant capital spend, detailed planning and care to retain the unique, historic character of landmark sites such as this.”
Another example is Accor Hotels, which has been adding UK regional hotels to its portfolio at an impressive rate in recent months. Some of the most recent additions to the group include Mercure Bredbury Hall, Mercure Dumfries and ibis Styles Romford.
These hotels are being relaunched this year, with the hotel giant investing heavily to bring them up to standard and have them ready for the return of business travel and the continuing staycation boom expected to surge this summer.
Discussing the acquisitions, Philip Lassman, Mercure’s VP Development Accor Northern Europe, explained: “The strength of our non-standardised and conversion brand portfolio such as the Mercure and ibis Styles brands, are attractive solutions for owners seeking global weight and local appeal.”
And the trend for regional hotel acquisitions isn’t just limited to growth-hungry, larger hotel groups. Deals are being made for a variety of purposes and by a range of small and large dealmakers, including those who are far less sector-specific when it comes to where they invest their money.
So, what’s behind the rush to buy hotels?
Analysts claim that the demand for hotels from private equity investors is also recovering. These kinds of buyers are generally looking to invest in any sector that demonstrates growth, driving returns on their investments. These investors clearly see the trend for UK-based holidays continuing, at least over the medium-term, regardless of the relaxation of foreign travel restrictions and guidance.
Some purchases have been driven by the rise in administrations in the industry, which has in part resulted from both the initial impact of the pandemic and the withdrawal of government support post-COVID. With government financial support now withdrawn and repayments now due on government-backed loans taken on early in the pandemic, more hotels may fall into administration. Such opportunities will be tempting targets for bargain hunters.
There is also the feeling that foreign investment is starting to come back to the UK hotel industry, which could further drive competition for targets. And at the same time, foreign tourists are gradually returning to the UK, further boosting demand for rooms, albeit with a much greater emphasis on established destinations like London and the South West.
Business owners keen to resume corporate travel
One of the main sources of business for many hotels – particularly those strategically located near train stations, airports or in business districts – is catering for people travelling on business. Clearly, this was a sector of the market heavily impacted by the early waves of COVID-19, during which travel was tightly restricted and the vast majority of employees worked remotely.
With remote working still widespread, this is an area of the hotel economy that has continued to lag somewhat, despite the easing of pandemic-related restrictions. However, there are indications that corporate travel is beginning to return to more normal levels this year and that’s great news for many operators in the hotel industry.
In spite of the huge disruption caused by the pandemic, demand for corporate travel is seemingly still strong. Certainly among UK business owners and decision makers, corporate travel is viewed as vital, with almost 80 per cent of UK corporate travel decision makers (CTDMs) polled in a recent study by Skift and TripActions saying that they either “strongly” or “somewhat” agreed that travel was important to boosting their company’s growth.
CTDMs cited establishing new business relationships, essential client-related travel and closing business deals as among the most important reasons for corporate travel. However, it should be noted that sentiment around business travel was weaker among travellers themselves, with just 56 per cent of UK travellers polled in the study saying they expected to take three or more business trips this year, compared to a global average of 65 per cent.
However, much of the power in this matter ultimately lies with business owners and senior decision makers, groups that demonstrate a strong appetite to have their employees travelling on business, particularly as they try to drive growth in the post-COVID era.
Ultimately, while hybrid working models and ongoing uncertainty may continue to impact business travel for some time, hotel operators should be encouraged by forecasts from the Global Business Travel Association that corporate travel will “surge” this year and return to pre-COVID levels by 2024.
Bigger operators may streamline portfolios
One of the lasting effects of COVID-19 in the UK retail sector has been that it demonstrated to many operators that having huge estates of physical stores strewn haphazardly across the country was not sustainable. As the hotel sector looks to emerge from the pandemic, similar thinking could help to drive M&A activity.
With massive staff numbers and huge portfolios of large hotels, big hotel groups are particularly susceptible to factors currently impacting the UK economy, such as rising energy bills, increasing labour and construction costs and shortages of labour post-Brexit. As a result, some bigger groups could turn to both sales and acquisitions as they look to focus their growth strategy by trimming their portfolio of underperforming or unnecessary sites and/or acquire more well-located, profitable hotels.
Premier Inn is among the UK’s biggest hotel operators and, with backing from its FTSE 100 owner Whitbread, has the financial clout to acquire and integrate independent hotels at speed and scale. This was demonstrated last year, when Whitbread said it was “well-placed to take advantage of the likely market structural changes”, as smaller, independent owners struggled with the impact of the pandemic.
However, despite these plans, the company has not been immune from issues impacting the hotel sector. The company has seen significant losses and falls in revenue as a result of the pandemic and, earlier this year, revealed that it was planning to increase room rates at Premier Inns in the UK in order to offset an expected 7-8 per cent cost inflation in the hotel sector over coming months.
Amid this backdrop, Whitbread has seemingly been making moves to adjust Premier Inn’s portfolio to make it more cost-effective and resilient. As well as voicing its intention to strategically acquire struggling independent operators, it has also indicated a readiness to make divestments that help to streamline its estate of hotels.
In Glasgow, for instance, the group has made some major changes. In June 2021, Whitbread opened a new 249-bedroom Premier Inn hotel in St Enoch Square, Glasgow. In the wake of this, it was announced in November 2021 that the considerably larger 278-bedroom Premier Inn at Glasgow’s Charing Cross station would be put on the market for £8.5 million.
As bigger operators continue to react to the impact of the pandemic, as well as the broader price increases expected to hit the industry, it may prove to be the case that some groups are pursuing divestments, as well as acquisitions as they refine the focus of their market proposition.
Funding could be the key to the market’s future
With the appetite for hotels very much established, the key to whether the sector simply recovers to pre-pandemic levels, or whether it sees sustained growth, could all be down to funding. While high street lending is getting back on track, banks are still reluctant to lend to new businesses and to players in ‘vulnerable’ industries including hospitality and hotels. Hotels are still not necessarily established as a safe bet for banks, amid problems such as supply chain issues and labour shortages (not to mention the risk of the pandemic flaring up again).
If banks do start to fund hotel acquisitions, sharing the same hopes, forecasts and insights that the private equity and strategic investors have for the sector, then this could be a major watershed moment for the market. The tourism market in the UK is still highly unpredictable because of the tumultuous nature of the past two years, but the hotel industry has every reason to be hopeful that Brits will continue to take more holidays closer to home, even as the rest of the world begins to open up.
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