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.

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue).  The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide.  CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting.  Please visit our website at www.cbre.com.