Key transactions include the £189m buy-back by Principal Hayley of six hotels from AAIM, who purchased them from Principal Hayley in 2006 for c£275m. Principal Hayley then sold the freehold to Pramerica on a sale & leaseback basis for £98m (4.0% yield). Other notable transactions include The Cavendish in St James by Singapore based Ascott Group which is expected to complete in October for c£159m representing a yield of c5.0%.
At this point it is difficult to ascertain the impact of Travelodge's recent CVA on investor confidence. Our view is that despite the CVA, investor confidence in Travelodge and the wider budget hotel sector will remain. Only 30% of the estate will be affected by the CVA, and if anything, this may improve their covenant position as it has reduced their exposure to underperforming locations and/or overrented assets. For those assets where Travelodge have exited, owners will be hoping that new hotel groups will be eager to fi ll the space that Travelodge's financing difficulties have created.
The difficulty of securing debt remains the biggest barrier to investment. This has led some
investors to take a more 'creative' approach to equity raising, such as the sale of freeholds in return for long term ground leases as seen with the Principal Hayley buy-back. Yields as low as 4% are being achieved on the most secure element of the EBITDA with rents set at around 25% of the open market value.
On a national level, investment activity has been relatively resilient, but this has been driven by London as investors have focused their attention on prime assets. London volumes to date have totaled £717m, accounting for 57% of UK volumes and are up 35% on the same period last year.
In contrast, activity in the regions remains subdued. There was a 14% decline in regional volumes this year.
Furthermore, as evidenced by the £1.2bn of unsold regional hotels on the market, conditions outside the Capital remain challenging. Having said this, we would expect to see appetite for good performing hotels in strong regional markets at the right price.
In the case of London, it is overseas investors who are driving activity accounting for 62% of London volumes this year. Asia Pacific investors dominated (79%) followed by those from the US with 16% of overseas investment. This represents a shift away from the Irish investors who dominated prior to the 2008 crisis.
However, this overseas interest has been very much focused on the top end/luxury segment, partly as it is a segment seen to offer strong capital protection but also due to the cache of owning and/or operating a well known London hotel. This is demonstrated by the changing ownership profile of Central London four and fi ve-star hotels over the last five years.
Examining the current ownership of Central London luxury hotels, UK owners continue to dominate with a 47% share of bedroom supply (see Graph 3). However, in line with the trend seen in investor activity, this share has fallen over the last five years by 11 percentage points as investors/operators from Asia Pacific, North America and Middle East capitalised on the favourable exchange rate and debt issues facing a number of UK hotel investors/operators to enter the London market or expand their existing portfolio. In terms of number of bedrooms, the greatest gains have been by investors/operators from India, Pakistan, Singapore, Canada and the US.
Estimates for year end UK volumes are that they will be in line with 2011. Going into 2013, at a national level, activity levels are likely to hold as regional activity remains subdued. Yet, the number of prime London hotels expected to come to the market next year could deliver a further increase in London volumes. The high profile nature of these assets will prove attractive to overseas investors, particularly those from the Middle East and Asia, increasing the international ownership of the top end London hotel market.
SAVILLS UK
