International real estate advisor Savills predicts a 3.9% capital growth increase in London's hotel sector this year with the Olympics boosting operational performance and the Queen's diamond jubilee bolstering domestic tourist demand.
It anticipates overseas investors will continue to focus on London's four- and five-star market and be the major driver for this sustained growth in values.
The firm, which reports a £1.5 billion investment volume for the sector in 2011, notes a total transactional rise of 0.8% year-on-year (yoy) against All Property which saw a 7.1% fall. It reports that despite a reduction in overseas investment by 39%, compared to UK institutions who have increased year on year investment by 12%, foreign investors have in fact driven trophy asset value growth by 6.8% - the highest of any subsector. Yields for prime UK hotels have held at 6.5% since February 2011, 95 basis points above UK prime yields.
Robert Seabrook, Savills joint head of hotels, says: "The biggest single challenge facing investors in the UK is the lack of debt. This, coupled with declining trading performance, is leading to a significant repricing in the regions while the weight of overseas capital focused on London is driving pricing higher, particularly in the trophy end of the market."
Savills notes that demand for prime assets has restricted investors to certain geographies such as South East, accounting for 68% of total volumes invested in 2011, and of this figure, 80% in London. In addition, the firm reports that there has been a clear appetite for leased assets with regional hotels operating under management contracts considered too far up the risk curve for those who have reentered the market. Of the £430 million invested by UK institutions, the budget sector saw 73% of their transactions reflecting expansion by budget operators.
Marie Hickey, Associate Director of Savills research, adds: "Operational performance is a big area of concern for investors with independent research showing room profit declines in both London and the regions, however the Olympics and Diamond Jubilee will no doubt provide a boost to London performance this year."