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Can UK hotels prove to be inflation proof assets?

Blog Can hotels prove to be inflation proof hero

The appetite for UK hotel assets remains unabated and at the IHIF conference in Berlin last month, the mood was largely positive.

Resort destinations such as Portugal, Greece and Spain are providing investors with opportunities, as is the continued success of the UK staycation market. Our domestic market has recovered at a much quicker pace than our European neighbours, having benefitted from the re-opening of the country taking place at a far earlier date. We expect Europe to catch up with a few months lag.

Despite all this good news, there are still oncoming headwinds. There’s no escaping the news that UK’s current annual inflation rate is at 9 per cent and interest rates are under pressure to rise. Both of these factors will undoubtedly have an impact on the costs of operating a hotel, and the rising cost of living may also dampen demand. However, one benefit of the asset class as a hotel is that it is fairly inflation-proof when compared to other sectors.

What are the benefits of hotel ownership?

Essentially, the benefit of being a hotel investor / owner during a particularly tight economic squeeze is that when compared to other asset classes, it is far easier to understand the running costs of a hotel and adjust accordingly. We have learned these lessons well during the pandemic with good operators achieving breakeven points previously unheard of in the hotel space. 

If you take an office for example, tenants may well be on a five or ten year lease, meaning that the levels of rent and service charge they pay is reviewed less frequently, therefore relatively slow to react to economic conditions. For landlords this can mean a building is being rented at a below market level for years before it can be adjusted. For hoteliers there is more inbuilt flexibility, with the ability to move the rate charged for a room dependant on market conditions and demand levels. That is not to say core office locations will not see interest from investors or that the industrial and warehousing runaway train investments will slow down, but hotels as an asset class are inherently more suited to inflationary times.

What are the challenges facing hotel investors?

However, the hotel sector is not without its issues. For some labour-intensive businesses with higher degree of services and food and beverage, it is hard to adjust the costs associated with supply chains.  There are widespread issues with staffing across the board including payroll and availability of people, and there is no easy solution on the table. Some have suggested increasing the use of robots to do tasks such as cleaning rooms and communal areas, however this comes with its own set of initial costs and set up issues. Debt is becoming increasingly more expensive, and while there are more lenders in the market than this time last year, the rise in interest rates has impacted the pace of deal making.  

There is a significant amount of equity circulating hotels at the moment, but not enough stock, although more of it is coming. This is particularly true in the value-add sector of the market where there will be a lot of demand from opportunistic investors. We expect to see a flight to quality with wealth preservation, key locations and strong brand or operators high on the investors list. Owner-operators will continue to grow their portfolios, particularly those that came out of the pandemic in good shape.

We see an increasing demand for platforms on national and pan-European level. In the UK, our latest UK Hotel Market Performance report shows that on the whole, the UK hotel market is on track to out-perform 2019 in many markets albeit in different routes to what was previously anticipated by some. It is great to see that seaside destinations of Blackpool, Bournemouth, and Plymouth topped their pre-pandemic performance across average daily rates and revenue per available room. This is testament to the UK regional market and the power of the staycation over the last year.

To sell or not to sell?

Ultimately, hotels need to be able to generate returns and rising costs need to be managed. If you are an owner, it is a good time to sell. New equity will come with new ideas, new energy, and will suffer less from the pandemic fatigue. We see little evidence in the last 12-18 months of pricing declining and the renewed international travel on top of many strong domestic markets recovering fast around Europe help increase investors’ confidence. New buyers will be able to wait out potential wrinkles in performance in the next few years, whereas existing owners who hold on to assets could find themselves in a few years’ time showing a weaker case for disposal.

The moral of the story is straightforward: If you have the capital, can invest, asset manage, do capex and build a strong future value – hold. If you don’t, sell because you can and the price is right with a large wall of money available. With fewer hotels being marketed, there will be less competition and a higher level of demand for each asset that is brought out. There is a sense that new owners are more willing to take on risk and seem not to be put off by the last two years. Something that could work favourably for those with assets that are ready to bring them to market.

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About the author
Saar Sharon is head of Hotel Capital Markets. He has more than 28 years’  commercial real estate experience specialising in hotels advising on disposals, acquisitions, asset management, funding, development leasing and management and franchise agreement across all classes in UK and Europe.
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Saar Sharon

Head of Hotel Capital Markets

National Capital Markets

London - West End

Saar is a hotel and real estate transactions specialist with over 28 years of commercial experience, advising on disposals, acquisitions, asset management, funding, development leasing and management and franchise agreement across all hotel asset classes in UK and Europe.

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