THE ANNOUNCEMENT that Tonstate has bought two of Hilton’s largest hotels for £417 million is the latest chapter in the long-running story of the financial restructuring of the UK hotel industry. Hilton will retain longterm management contracts to operate the hotels and proudly boast that its worldwide asset-sale programme has realised more than $2 billion since last year.
Earlier this month, two groups of property investors purchased Menzies Hotels for £180 million. The Hilton deal was therefore the second major transaction since the failure of Swallow Hotels and its parent company, London & Edinburgh, last month, and confirms that there is no waning in investor appetite for hotels.
Since investment in UK hotels became popular with financial and property investors, there have been bumps and bruises along the way, such as the failure of Le Meridien Hotels and Swallow Hotels and litigation between Quinn Group and De Vere Hotels over the Melvin Gold is a hotel industry consultant management contract for The Belfry.
Market circumstances also posed problems: 9/11, conflicts in Afghanistan and Iraq and the London bombings all set challenges that have been overcome. None of these has deterred the seemingly endless investor interest in the sector. Why?
Firstly, the hotel industry is doing very well, especially in the UK. Data from hotel benchmarking specialists The Bench shows that by the end of September, London hotel-room revenues were up by 18.1% over the previous year (which was hit by the London bombings) and the regional figure was 5.1%.
Occupancy and average room rate have both risen impressively and, with the Olympics on the longer-term horizon, further real growth is likely in the next few years.
Secondly, financial yields from hotels are typically higher than can be achieved in other property investments. Thirdly, the covenant strength of major global corporations such as Hilton Hotels Corporation gives investors confidence and underpins their investments.
Finally, investors take the view that hotel companies have not maximised asset management, and are keen to take advantage of perceived opportunities in property investment or financial restructuring.
Overall, expect hotel investment by the financial and property community to continue. With prices and appetite high, it is hard to criticise any hotelier for choosing to sell assets in the current climate.