"We have been offered a hotel in Central London, it's not on the open market but with an offer of GBP £ XX million, we can get exclusivity. Katrina, do you think it's worth pursuing?"

I've been asked this question many times over the past decade and it usually raises a big red flag. London is one of the most lucrative and resilient hotel markets in the world. A hotelier can rent a room to either a business or leisure guest, whether domestic or foreign, 365 days of the year. Due to strict planning restrictions and the recent dearth of development finance, hotel supply has not kept pace with demand. As a result, London hotels continue to attract interest from investors of every ilk - sovereign wealth funds, property funds, family offices, high-net-worth individuals and the operators themselves. In such a seller's market, why on earth would the owner of a central London hotel not engage a reputable property agent to sell the property on the open market?

Urban Cowboys

The most likely answer is that the hotel is probably not really for sale, but someone who "knows the owner" or "knows someone who knows the owner", thinks he can wrangle a success fee if he can produce an unsolicited offer from a potential buyer. There is no shortage of opportunists around. I've even come across a con man who was selling a hotel online that I knew was definitely not on the market.

When vetting opportunities for my clients, I look for proof that an agent is engaged by the owner and would be compensated by him/her in the case of a successful transaction. Crucially, the agent should be able to arrange a meeting with the owner on the basis of a non-disclosure agreement signed by my client. If the agent fails either of these tests, he is probably a cowboy.

The Stalking Horse

Sometimes a property is being offered 'off the market' because the owner is testing the market to see its potential to generate interest at a price that would make a good return on investment. The truth is that if an owner were truly serious about selling, he could commission a RICS appraisal and would not accept offers based on conjecture. In any case, a serious offer cannot be made in the absence of an analysis of the hotel's documentation. Is there a virtual data room containing the property titles, trading figures and other essential information such as technical surveys and outstanding planning applications? If not, the property is not yet ready for sale and any efforts made to extract this information will most likely be a waste of time and money.

The Acid Test

Having verified that the target hotel is indeed for sale and that one is dealing with client's authorized agent, there are many issues to consider before making a binding offer. These will often be driven by the investor's profile and objectives. Here are a few basic questions that should be answered during the due diligence process:

Q: Is this an investment-grade property that will be easy to sell at the end of your investment horizon? 

  • Are all technical drawings, design and construction warrantees and maintenance records in order?
  • Are there any hidden structural or planning problems with the building?
  • Are there any liabilities relating to the ownership history, management, suppliers, customers, government taxes, or employees?
  • Is the property freehold and if not, is the leasehold long enough to make a return?
  • Are there any threats from future developments or regeneration efforts in the area?
  • Is the property in a location with enduring appeal where property values are increasing or tend to hold their value through the economic cycle?

And concerning the upside…

Q: Are we "making a profit going in" given the asset's price and any upside potential?

  • Is the asset fairly priced vis-a-vis yield and other hotels of similar character in the area?
  • Is the hotel achieving its fair share of the market and if not, does the price take into account the resources needed to improve performance?
  • Are all the details in the data room accurate? (key count, square meter measurements, financials)
  • Is the sale structured advantageously for tax purposes e.g. going concern vs. asset purchase? Are there any unused capital allowances?
  • Is there a potential change of use to residential or commercial units that may allow you to sell the asset at a premium in future?
  • Can you extend, renovate or change the room mix to increase revenue potential?
  • Is there branding or re-branding potential and how much will it cost to bring the property up to a brand's standard?
  • Is the area being regenerated?
  • Acquiring a hotel in Central London is no easy task. Ensure that you take the time to answer the questions above and choose a team of professionals to advise you who offer a holistic service and are not only motivated by the transaction. The complexity of doing business in London and the acquisition process means that the right team is essential to keep the transaction rooted in reality.

Hotel Solutions Partnership offers specialist hotel consultancy services to hotel owners, operators, brands, developers, lenders and investors around the World. Hotel Solutions Partnership is a hand-picked network of experts. Between us, we have expertise in more than 75 disciplines, covering all the elements involved in running a successful hotel or hospitality business in today's globally competitive and evolving environment. Click here to learn more.

Katrina Craig
Principal and COO Asia Pacific
+44-20-7823-9153
The Hotel Solutions Partnership

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