In this guest article, reproduced in full from an original post on LinkedIn, co-founder of AGO Hotels, Viv Watts, outlines why UK hotel investment is experiencing significant growth so far this year.
Despite a tumultuous past two years for the hotel industry, as we near mid-Q1 2022 we are beginning to see an uptick in the market with significant growth in UK hotel investment.
This increase in appetite for investment in the sector is borne out by recent research from Savills and Knight Frank, which highlighted transaction volumes in 2021 were significantly above 2020 and expect this trend will grow further in 2022, forecasting transactions may reach £4.5 billion by the end of the year.
It’s safe to say at AGO Hotels, we see 2022 as being a very exciting year for hotel investment and growth of the hybrid lease as a strong alternative for hotel investors.
Why is hotel investment gaining traction now?
There are several factors contributing to the increase in UK hotel investment. Despite travel bans, lockdowns and ever-changing rules and restrictions, people found new ways to holiday over the past two years – and hotels found ways to adapt. The ‘staycation’ regained its popularity in the UK, with people traveling domestically and enjoying the benefits offered by destinations closer to home. AGO believe there will be a strong bounce back with the return of international visitors in 2022 which will continue to drive and support further recovery.
Additionally, there is an expectation of an increase in properties which will come to the market versus the last 18-24 months, including some UK centric hotel portfolios This increased supply is likely to be generated from hotels which may have closed and are struggling for various reasons with the reopening, or from owners who have not been able to withstand the ups and downs of the pandemic and are moving their efforts elsewhere. In response to this supply, we have seen an influx of demand from new investors who previously never invested in the hotel sector before and now see the opportunity for long-term investment with strong returns
Fundamentally there is an underlying belief the hotel industry is here to stay – it can’t be replaced by online alternatives, and the impact of the pandemic can only be temporary as people will always revert to traveling.
Investors coming into the sector are looking for models which will meet the demands of the post-pandemic world. This is where we see an incredible opportunity for the AGO Hotels lease model.
Assets with long leases, providing secured income whilst not needing involvement in day-to-day operations, have become rarer and harder to find. The volatility of 2020 highlighted which tenants had the ability to continue to pay rents during a downturn, and those who could no longer service their rents as either they had committed to high rents, or their businesses became over-geared.
This led us to look at hotel investment from both the landlord and the tenants’ perspective, thinking about how we would structure a lease so the tenant can withstand any downturns, and ensuring the landlords benefited from upturns in the profit. This essentially aligns the landlord, the tenant, and the operator/brand. The hotel investment sector is appropriate for being able to offer a long-term lease which sustains rent through the good times and the bad times, and shares in the upside with landlords
In the AGO lease model, AGO Hotels is the tenant, contracted to pay rent for 25 years linked to the Retail Price Index and on a full repair and insuring basis. The AGO model can withstand the toughest of markets, proving this by paying rents in full and on time even during the pandemic. AGO have gone beyond just paying rents, and despite the pandemic delivered to some hotels on the profit rent element our model is built around.
Who is investing?
The hybrid lease model opens new doors in hotel investment, adding to the range of options available to investors wanting to be involved in the hotel market. We are now seeing interest from broader geographic territory as well as new entrants to the hotel sector.
The pool of investors has broadened with opportunities for pension funds, charities, local councils, and institutional investors as well as the long-term real estate owner/ investor. The AGO hybrid lease has created more appetite for Institutional investors and pension funds who historically struggled with taking operational involvement or exposure. Through the AGO lease they have been sufficiently satisfied, they don’t have operational involvement or obligation, and they do have minimum rent. The economic climate has encouraged institutional real estate investors to reconsider their views on the pure rent only models versus hybrid leases with rent and operational upside.
AGO are looking forward to seeing how alternative lease models grow throughout this upcoming year of hotel investment, and how both the property industry and the hotel industry continue to adapt and change as we come out the other side of an unusual few years.
*Viv Watts is co-founder of AGO Hotels. You can see the original LinkedIn post here.