London, 19 July 2016 – Fixed income lease structures are set to become more prominent throughout the UK hotel sector over the next three years as investors look for long-dated income and low-risk opportunities.
Over the same period, 31% of total new room supply coming to the market is expected to have a long-lease structure in place; this will be a catalyst in attracting greater investor interest, particularly given the shortage of quality long-income opportunities in more traditional asset classes.
London and Edinburgh are two of the UK’s strongest performing hotel markets and both have a high proportion of hotels encumbered by an operational lease. London boasts the greatest product diversity in the fixed-income hotel space relative to other UK markets with 58 hotel groups offering operational leases in the capital. 24% of the 140,865 rooms in London are currently operated under a fixed-income lease agreement and over the next three years 20% of the new rooms due to come online will be under a fixed income arrangement. 37% of Edinburgh’s room supply is operated under a fixed-income agreement. Over the coming three years, the Scottish capital will see an increase of 15% in overall room supply equating to 1,997 rooms. Of this total confirmed pipeline, 1,223 rooms (61%) fall into the fixed income space.
Lee Bruce, Senior Director, Valuation & Advisory, Long Income Valuation said: “There has been a significant increase in capital coming from the pension funds, primarily focused on inflation-linked investments. Many are seeing fixed income real estate as a substitute for government bonds.
“The funds have been attracted to the hotel sector because many operational leases are index-linked and therefore offer liability matching potential. The fact that hotels are operational assets also means that there is a lower risk of permanent void in comparison to other commercial real estate classes. A shortage of supply in other long lease real estate asset classes has pushed more investors into the hotels sector where we have seen a healthy churn of stock and good quality covenants.”
Source: CBRE 2016
Marc Nelson, Associate Director, Brokerage, CBRE Hotels said: “Looking ahead, the fixed-income hotel market is likely to become less opaque as we witness greater liquidity and data availability – this will likely result in a deeper buyer pool.. While we have seen a sharpening in fixed-income hotel yields since the last downturn, the risk premium based on gilt-edged stock remains substantial relative to historic levels, indicating that hotels still offer attractive risk-adjusted returns.
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