Hotel expert hails the return of the provincial market

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The independent sector continues to go from strength to strength, offering buyers the promise of strong growth and revenue. Paul Hardwick, director & head of hotels at Fleurets explains why the provincial market especially has become so attractive to potential purchasers.

Due to a combination of market and economic factors, alongside the growing dominance of branded hotels, many have speculated that we would eventually see the demise of the unbranded provincial hotel. Such hotels have been under attack from all angles, be it economic pressure, difficult trading conditions, and new/improved competition at all service levels. That said, this market is by no means dead.

Provincial hotels have recently experienced exceptional levels of activity, most recently evidenced by the Topland acquisition of a portfolio of eight hotels from the Feathers Group providing 726 bedrooms. This is the latest acquisition in Topland’s investment strategy to grow its regional hotel portfolio, having spent approximately £200m on 28 hotels in just over one year.

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Sector confidence has been bolstered by improving trading performance and hotels generally showing positive key performance statistics, which is anticipated to continue for the foreseeable. In addition, many purchasers perceive this sector of the market to offer several opportunities for strong income and capital growth, and thus it is considered by many as a good value investment arena.

Unlike the market in the capital, there are more provincial group/portfolio acquisition opportunities, allowing group level purchasers to improve business efficiencies through the incorporation of individual and small numbers of hotels into a larger ‘machine’, thus growing profitability. In addition, in many instances, provincial hotels are suffering from the usual recessionary symptoms of under investment and under performance.

As a result, an obvious purchaser opportunity is capital investment supported by new motivated management driving performance. Hotels in this sector often offer branding opportunities, at a much lower cost than new build. Many hotels also offer value added opportunities through intensive asset management, for example, through surplus land development or disposal. As ever, growing activity in one area of the market typically leads to rising prices, as more new buyers jump on the acquisition bandwagon.

A growing pool of buyers set against a diminishing number of the perceived best ‘value’ opportunities, means competition intensifies, leading to upwards pressure on hotels pricing.

The price expectation gap between nondistressed sellers and motivated buyers narrows, which is good news for owners but less good for buyers, as increasing pricing gradually erodes the potential ‘upside’ of a deal through supply/demand price adjustment. As the low(er) hanging fruit is picked, buyer interest spreads to the next best opportunities. This may be to the benefit of hotel owners that have been holding out in the hope that the market catches up with their price expectations. However, economic uncertainty continues to be the elephant in the room and there is a risk that owners holding out too long for too much might well ‘miss the boat’.

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