Private equity in the UK hotel sector – Lawrence Telford, Director, comments

May 15, 2008

The last 12 months have been a roller coaster year in the hotel market, which witnessed significant transactions across the sector, particularly involving private equity backed companies, including the headline grabbing Hilton Hotels Corporation acquisition by Blackstone. However, it was not all smooth running and the sector was also defined by the failure to place the first dedicated hotel REIT and the fall out of the US subprime mortgage woes resulting in the credit crunch which overcasts the sector and wider economy.

Trading performance has proved robust across the sector with growth in RevPAR underpinned by continuing high occupancy levels. Whilst there are pressures on business and consumer spending generally, ongoing growth is still anticipated during the forthcoming year. The underlying robust performance of the hotel market has continued to attract private equity investors and indeed institutions to this asset class and we have seen the resulting competition increase prices and compress yields to new low levels.

Significant deals in early 2007 included the £270m sale and leaseback transaction of six Principal Hotels owned by Permira; and Moorfield Real Estate Fund’s £400m acquisition of 24 Macdonald hotels. The largest transaction in the first half was RBS’s sale of 47 Marriott hotels for £1.1bn to a consortium led by Quinlan Private.

Pre-credit crunch, this appetite continued with Land Securities entering the fray to acquire 30 Accor hotels in a £430m sale and leaseback. In another large transaction, the Jury’s Inn chain was acquired by a consortium led by Quinlan Private for £790m.

The ensuing credit crunch undoubtedly had an impact on the hotel sector with a number of larger transactions floundering due to the banks’ tightening lending criteria. Notable aborted deals included the proposed £200m sale of Kew Green Hotels and the £400m sale of 19 Queens Moat House Hotels, both of which had been provisionally agreed to aAIM Group.

Furthermore, MWB’s Malmaison & Hotel du Vin chains also failed to transact after being offered for sale following the failure of Vector Hospitality’s proposed Real Estate Investment Fund (REIT). The boutique chains, together with 10 RBS properties, were to have been offered as part of the UK’s first dedicated hotel REIT valued at £2bn, but a number of factors including Institutional concern over corporate governance issues resulted in the proposal being shelved.

The wider commercial real estate market has seen significant price corrections and valuation write-downs over the last six months. As a result, hotel investors have undoubtedly been more cautious particularly as transactions now require more equity input following reduced loan to value terms and consequently the reduced leverage will
have a softening impact on yields.

However, the tightened credit markets have not reduced investor’s appetite for hotels as demonstrated by the largest deal of the year, Blackstone’s acquisition of Hilton Hotels Corporation. Furthermore, the recent environment has provided opportunity to less leveraged buyers such as Sovereign Wealth Funds and High Net Worth individuals (“HNWIs”) who have moved quickly to acquire their favoured trophy assets. In particular a number of RBS’s individual hotel assets previously earmarked for Vector’s REIT have subsequently been acquired by HNWIs including the Park Inn at Heathrow and the Victoria and Albert Hotel, Manchester, both of which were sold to Yianis Group for a reported £175m.

The appetite for hotel investment has certainly not waned and the asset class will continue to be in demand by private equity and institutions alike. Demand for good quality hotel real estate still exceeds supply, particularly those assets either leased or managed by strong, branded operators which are crucial in underpinning and driving asset values.

There has been a re-pricing in the market and some larger deals may have to wait for credit lines to re-open but the big transactions will be back.