The Covid-19 pandemic brought about a turbulent year for hotel trading performance, with UK hotel investment in 2020 declining by 70% year-on-year according to property adviser Knight Frank.
However, it is hoped that 2021 will see a strong recovery during the second half of the year, driven by the mass vaccination campaign.
According to Knight Frank's Hotel Transaction Trends 2021 research, the UK hotel sector saw investment volumes in 2020 total £1.8b, compared to £6b the previous year. Of this transaction volume, 81% occurred in the first quarter of 2020 (£1.5b). London, which accounted for 76% of the total UK volume, witnessed a decline of 49% in transaction volume, with the sale of the Ritz contributing £750m to the capital's total investment of £1.4b.
Economic disruption, forced temporary hotel closures and restrictions on travel and social engagement due to the ongoing pandemic all contributed to the level of hotel investment being severely curtailed, with a dearth in portfolio activity. While overseas investment declined by 44%, Qatari, Israeli, US, Singaporean, Thai and European investors accounted for 63% of total UK hotel investment.
The main drivers for most UK hotel transactions throughout 2020 were retirement sales, hotels sold for alternative use, non-core assets sold to bolster equity and non-alignment of shareholder interests. These single-asset hotel sales were predominantly independently owner-operated, significantly smaller in size and lower in value than the traditional branded and well-capitalised hotel assets which would transact under normal trading conditions.
The financial impact of Covid-19 on hotel assets has been severe. With lenders forced to be flexible towards their borrowers they have been acutely focused on supporting their existing clients, resulting in many hotel properties being refinanced or their existing financing being restructured and/or extended.
Government financial stimulus and the support of lenders, in terms of their flexibility and leniency over covenants, capital repayments and interest holidays, have prevented significant distress and allowed many hotel businesses to survive.
Henry Jackson, head of hotel agency at Knight Frank, said: "Despite the extreme challenges that the UK hotel sector is enduring, the long-term fundamentals remain positive and the sector will recover as the economic landscape starts to revive. Achieving a successful mass vaccination campaign is vital to the lifting of the current trading restrictions imposed on the sector, which in turn will lead to an increased level of hotel investment.
"We envisage an increase in Covid-induced investment activity from Q2 and thereafter, driven by pressure exerted from stakeholders. With softer pricing available, this period immediately following the Brexit transition may serve to further strengthen investor appetite, attracted by long-term investment prospects. We expect to see overseas investors target quality assets in London and other gateway cities, as well as further repurposing of assets and land sold for alternative uses as investors continue to diversify their portfolios throughout 2021."
Knight Frank said there was potential for owners to bring assets to market in the first quarter, as vendors look to capitalise on limited sales opportunities. Once the mass vaccination campaign advances, the second half of 2021 is set to drive strong demand for hotels, with the domestic leisure market continuing to lead the recovery.
However, for many hotels this recovery may come too late, given the extended time in a national lockdown and the likely continued localised and sector restrictions thereafter. As such, Knight Frank predicted an increasing number of distressed assets and consensual sales, due to the lack of cash reserves.