The UK hotel industry finds itself at a pivotal moment, navigating the challenges and opportunities presented by a dynamic economic and political landscape. As the sector adapts to shifting market conditions, funding gaps, and emerging trends, it is also poised for significant growth and innovation. Here, we explore the state of the UK hotel industry and what lies ahead for investors and developers.

Current Market Conditions and Trends

The UK hotels sector has rebounded impressively from the COVID-19 pandemic. Initially characterised by a sharp rebound, the growth has now stabilised, but the industry continues to enjoy high occupancy rates, leading the world in this area. Average daily rates have also seen significant growth, underscoring the sector’s resilience and strong performance. With approximately 91,000 rooms in the development pipeline, the fourth largest globally, the UK market is experiencing robust investment activity, which is expected to persist.

However, political changes under the new Labour government bring uncertainty alongside opportunity. While the government recognises hospitality as a key sector, proposed regulatory changes, particularly around labour laws and environmental, social, and governance (ESG) considerations, could reshape operational dynamics. Investors and operators will need to adapt to this evolving regulatory framework.

Key Trends

  1. Hotel Conversions: Due to the complexities and costs of new hotel developments, conversions have become a popular method of expansion. With higher build costs and lending rates making ground-up developments less attractive, alternative lenders are stepping in to finance these projects with higher loan-to-value ratios.
  2. Event Centric Hotels: The emergence of hotels around UK sports venues and entertainment districts, inspired by the U.S style models, is a growing trend, creating opportunities for integrated hospitality experiences.
  3. Luxury and Branded Residences: The luxury sector has witnessed significant growth, with branded residences leading the way. High net worth individuals are driving demand for larger spaces with premium amenities, offering privacy and security alongside access to high end hotel services.

Planning Challenges for Repurposing

Repurposing buildings into hotels is a well-established practice in the UK, yet the planning framework remains relatively rigid. Hotels fall under use class C1, which does not allow for seamless changes of use without planning permission. Unlike other sectors benefiting from expanded permitted development rights, hotels must navigate these planning hurdles unless the change involves specific cases, such as converting a hotel into a state school.

Given the abundance of vacant properties in central locations, there is significant untapped potential for hotel conversions. Local planning authorities (LPAs) are often supportive of such projects, recognising their role in revitalising areas and driving footfall. Early engagement with LPAs is critical to obtaining operationally viable planning consents, especially when repurposing historic buildings. Listed properties require additional consents and considerations to preserve their architectural or historical significance.

Financing the Sector: Bridging the Funding Gap

The financial landscape remains challenging, with inflation, high interest rates, and tightened lending criteria slowing transaction activity. However, hotels continue to be an attractive asset class. Traditional lenders have scaled back, creating opportunities for private capital, family offices, and high-net-worth individuals to step in. These players often bring higher costs but also greater flexibility in structuring deals.

Key Financing Issues

  • Refinancing Pressures: Borrowers face tighter terms, restrictive covenants, and less favourable loan to value ratios, potentially leading to funding gaps. Planning ahead and engaging with lenders early is crucial to overcoming these challenges.
  • Capex Challenges: Capital expenditure (capex) funding, often tied to existing financing arrangements, can face restrictions. Lender consent is typically required for renovations, and some lenders limit distributions during capex periods, creating additional hurdles.

ESG: A Growing Focus

Sustainability is increasingly shaping the UK hotel sector, driven by consumer demand and investor priorities. Hotels are embracing ESG principles, from energy efficiency and waste management to socially responsible operations. Smart building technologies, integrated into refurbishments or new developments, offer opportunities to improve energy consumption. Sustainability-linked loans and green financing options are also gaining traction, providing incentives for environmentally conscious projects.

Investment Outlook

The first half of 2024 saw a significant resurgence in UK hotel investments, with volumes reaching approximately £3 billion, which is a sharp increase compared to 2023. Stabilising interest rates and narrowing pricing gaps between buyers and sellers are fostering a more favourable investment environment. As investor confidence grows, the sector is well  positioned for further activity in 2025 and beyond.

Conclusion

The UK hotels sector is navigating a complex but promising landscape. High occupancy rates, a strong development pipeline, and growing investment volumes signal resilience and opportunity. While regulatory changes and financial challenges present obstacles, the industry’s adaptability, coupled with innovative trends such as hotel conversions and ESG advancements, positions it for sustained growth. By embracing these changes and planning strategically, investors and developers can capitalise on the sector’s potential in the years ahead.

The Commercial Property team at Lewis Denley offers comprehensive legal advice on the acquisition, development, and disposal of hotels. Our expertise spans the entire lifecycle of hotel transactions, ensuring clients receive tailored guidance at every stage.