Investors fix sights on Fixed Income Hotels

London, 31 October 2018 – Investor interest in fixed income hotel real estate has continued to grow in popularity over the past 24 months as investors increasingly look for long-dated hotel assets which have resulted in the market moving into the mainstream.

The fixed-income hotel market continues to grow as the confirmed UK development pipeline will reach over 100 hotels that will be run under an operational lease. Over the past 10 years, total UK room supply has increased by 16% but demand has grown by 35%. A considerable percentage of the new room supply is expected to be operated on a leased basis. This is expected to attract greater investment activity into the sector, particularly given the shortage of quality long-income opportunities in some of the more traditional asset classes. 

Investors have been attracted to the hotel sector because many operational leases are index-linked and therefore offer liability matching potential, this is also evident in the compression of capitalisation rates over recent years. With every occupied room being an effective “tenant” with the rent reviewed nightly, the risk of therefore of permanent tenant void in comparison to other commercial real estate classes is relatively low. 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.

Investors seeking secure income have continued to be the most active buyers in the sector. UK funds continue to target the budget hotel market, because of the strong covenants and inflationary linked income, which has resulted in record yields paid for Premier Inn and Travelodge investment opportunities. Until recently operators like Travelodge and Premier Inn have dominated the market, however, these brands have been recently joined by other challenger brands such as Motel One and Dalata Hotel Group, who are expanding in the UK by aligning with traditional fixed income investors.

Marc Nelson, Director, CBRE Hotels, commented: “I believe that 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, with investors starting to benefit from greater value appreciation in the asset class.  And, although 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. When coupled with the robust underlying fundamentals and appealing risk-adjusted returns, investors’ appetite for hotels will continue to remain strong.”

Considering the weight of capital chasing traditional fixed-income investment, combined with a scarcity of available investable stock, CBRE expects to see more forward funding deals and pricing that will hold for the foreseeable future.

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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2017 revenue). The company has more than 80,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
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