Commercial property: Scotland open for hotel investment

Scotland’s prime cities have been named among the most active areas for hotel investment last year, with Glasgow finishing in top spot, according to analysis from Knight Frank.

Exterior architectural photography of the golf course and hotel at Fairmont Hotel in St Andrews Chris Humphreys Photography

The independent property consultancy’s UK Hotel Capital Markets Investment Review 2020 found that there was about £260 million-worth of hotel deals last year in Edinburgh, Glasgow, Aberdeen, and Inverness.

Glasgow was the most active city in Scotland, and third in the UK, outside of London, with £170m spent across
nine transactions in 2019, which comprised more than 1,700 rooms.

Beyond the country’s four main cities, there was further significant deal activity during the 12 months, with a dozen assets – consisting of about 900 rooms – changing hands for approximately £115m.

The sale of the Fairmont St Andrews was the biggest deal of the year in the Scottish ‘secondary’ market, contributing about 45 per cent of the total investment figure.

John Rae, head of Knight Frank’s Glasgow office, says: “It [was] a strong year for investment in Glasgow hotels, a reflection of the fact that it is emerging as a highly desirable tourist and events destination.

The scheduled COP26 2020 United Nations Climate Change Conference for later this year is indicative of the scale of events that Glasgow can now attract and host, and it presents a massive opportunity to highlight all the city has to offer to the world.

Rae observes: “There are a substantial number of hotel rooms to be added in Glasgow over the next few years, with a range of well-known and boutique operators confirmed or planning new premises in the city.

“As they come on stream, we expect hotel investment activity to remain strong in the years ahead as investors increasingly look to alternative property assets.”

The Knight Frank report also found that hotel deals in Scotland have been boosted by the growing popularity of ‘ground rents’ transactions in recent years – a form of sale and long-term leaseback deal that delivers a steady income for investors and guaranteed access to a property for a hotel operator.

According to the firm’s analysis, ground rents transactions have accounted for approximately £100m of assets over the last three years, including the Hotel Indigo Glasgow, Marriott Moxy Aberdeen, and Apex Edinburgh – which represents a noteworthy uplift on previous years.

Alasdair Steele, head of Scotland commercial at Knight Frank, adds: “We have seen a significant increase in the number of ground rents deals since 2017, as investors seek out sources of secure, long-term income and hotel operators look to free up cash to invest in their businesses.

“They are also proving popular with similar types of occupiers, including the student accommodation and healthcare sectors.

“We expect ground rents to grow in popularity in Scotland, both among investors and occupiers, in line with the rest of the UK.”