Search

×

After Brexit vote, what’s next for U.K.?

Since the U.K. sent its currency bouncing and stunned Europe – and many Britons – in the days after its citizens voted to exit the European Union, hotel investors and industry observers are refocusing on business as usual, tweaking their approach but not overhauling their strategies – at least not yet.

Dalata Hotel Group in late September announced it had agreed to buy the operating interest in the former Burlington hotel in Dublin, now a Double Tree, and is looking to lease new hotels with the Maldron or Clayton brands in large cities including Glasgow, Edinburgh, Manchester and Brighton. “However, we have set our investment hurdle criteria at higher levels to take account of the Brexit risk,” says Dermot Crowley, deputy chief executive of business development and finance for the company, which owns, leases and manages hotels in Ireland and the U.K. That’s likely to slow expansion. The company is not considering selling properties and hasn’t seen an effect on booking, Crowley wants to shore up group and corporate customers in case leisure business falters. 

Crowley might be reassured by PwC’s most recent U.K. forecast, which predicts cuts in corporate travel budgets, but not tourism, that could hit London hotels in 2017. The consultancy forecasts 77% occupancy rates for the rest of this year and 2017 in the regions; London could see a year-on-year occupancy decline of 1.8% in 2016 and a further decrease of 0.8% in 2017, taking occupancy down a percentage point to 80%.

“I don’t think London will disappear overnight,” says Russell Kett, chairman of consultancy HVS. “I think the U.K. will still be an attractive place to do business.” Kett is “cautiously optimistic” but says fewer deals will be done this year. “We expect the yearend to have a sort of €11 billion to €15 billion investment for European hotels,” compared with about €26 billion in 2015, he says.

 “London has very high barrier to entry in term of opening new hotels,” says Sean Hehir, principal, president and CEO of Trinity Investments. “There’s not going to suddenly be a dearth in supply. In the near time, it’s a major financial and tourist hub. London been through a lot in the last 30 years and I remain bullish on the hospitality space.”

Starwood Capital’s Royal York hotel in York, England
Starwood Capital’s Royal York hotel in York, England

Starwood Capital Group is not straying from its investment strategy. The company counts 50 U.K. properties in its Principal Hotel Company. “We continue to be active on the acquisition front in the U.K. and the continent,” says Cody Bradshaw, senior vice president at Starwood Capital and head of European hotels. “We wouldn’t buy a property in the U.K. based solely on GDP and RevPAR growth. That’s not our business model.”

Bigger picture, Bradshaw says that the rest of Europe, particularly Germany and its robust trade partnership, has a vested interest in keeping the U.K.’s economy chugging.

“The investors I’ve spoken to are not looking to exit right now,” Hehir says. “For new investors coming in, the question is around the currency and how that’s going to behave.” Those investors – Kett cites China and elsewhere in Asia, Bradshaw points to the Middle East – are circling for bargain properties, but they’re not seeing the smoke of fire sales. “That’s where you need the passage of time to see where the trend is going to be,” Hehir continues. “I’m very focused to see whether there are opportunities to enter the market again.”

Some of those properties may come from Starwood, Bradshaw says: It has sold five non-core provincial assets and it may sell another 10, possibly achieving about £150 million in dispositions. “Our strategy was always to capitalize on a fragmentary U.K. and European space.”

What to watch

Crowley says it’s too early to say whether London will see an exodus of jobs, particularly in financial services, as Brexit unfolds. But he is most concerned about the performance of the U.K. economy and the effect on the performance of Dalata’s hotels there, along with the number of U.K. visitors to Ireland. The next step – triggering Article 50, the declaration of withdrawal in the EU treaty – is expected in March, with formal ties finally cut in early 2019. “As the only English-speaking country in the EU, Ireland is likely to become even more attractive as a location for U.S. foreign direct investment,” he says.

Hehir is watching tourism trends for a change in pattern, perhaps a shift to other European countries. “People tend to have very short memories when it comes to major events,” he says, recalling a visit to Japan shortly after the Fukushima nuclear disaster in 2011 and seeing a “ghost town” in Tokyo. A couple of years later, it had bounced back. “It’s interesting how resilient people are and how quickly they can resume normal activity.”

Bradshaw is briskly optimistic. “We can’t sit around and wait to see what’s going to happen five years from now,” he says.

Comment