Hotel M&A remains resilient despite challenging market

A new report on the UK hotels sector has revealed that M&A remains resilient despite a challenging market environment, with a wealth of investors keen to do deals in the industry and an uplift in activity over recent weeks.

In its "Hotels: 2023 Mid-Year Review", specialist hotel property adviser Christie & Co has analysed the trends and challenges facing the hotel market. The report shows that market activity was subdued during the first half of the year, as a result of ongoing macroeconomic issues.

During the first half of 2023, there were 663 transactions in the UK hotel industry, down by more than half from 1,580 during the first six months of 2022. According to Christie & Co, this resulted from “an ongoing disconnect between top-line revenues, asset pricing and financing challenges”.

The report also cites the “bid-ask spread” between sellers aiming to secure a high valuation amid positive trading result and buyers who were factoring debt costs into their pricing, as well as ongoing challenges surrounding the financing of portfolios, which led to a drop off in deals involving portfolios of hotels.

The report adds that the Bank of England’s decision to raise interest rates to 5 per cent in June “will undoubtedly put added pressure on owners facing refinancing and on transaction yields” and that debt will continue to get worse in the sector before it improves.

Christie & Co warn that: “While the sector has been able to withstand distress given lenders’ lenience, the next 18 months may be different as much debt with 2022 expiry has been pushed to refi in 2023.”

However, despite these challenges, the report also states that there is “no shortage of capital keen to invest in hotels”, which have proven to perform well against inflation, with strong growth in demand. The market has seen strong activity in individual deals, despite a lack of deal flow leading some buyers to pause their activity.

Looking forward, Christie & Co says it is confident that the remainder of 2023 will see stronger activity, citing a recent uplift in deals. The report states that a stubborn inflationary environment and recent interest rate increases could lead to more challenging trading conditions over the next 12 to 18 months, potentially leading to the upward trend in trading performance decelerating.

Given this environment, capital structure challenges and pre-pandemic debt, Christie & Co forecast that distress could lead to deal opportunities, due to lower loan-to-value (LTV) ratios, downward valuation pressure and higher debt costs.

Commenting on the report’s findings, Carine Bonnejean, Managing Director of Hotels at Christie & Co, said: “Whilst market activity remained sluggish for most of H1, we started to see some positive signs of a shift in the lead up to summer, suggesting that activity will be stronger during H2.”

“We have brought several exciting opportunities to market in recent months, including a portfolio of Coast & Country assets with very strong interest received to date, which is a good barometer of buyer appetite. We remain optimistic that we will see increased opportunities throughout the rest of 2023.”

Read about M&A trends in the wider UK hospitality sector.

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