Hotel Update
The UK hotel sector in 2025 presents a divided and somewhat challenging landscape.
Regarding top-line performance, the sector saw a shaky first half of the year however has been buoyed by a strong end to the summer.
Data from September trading indicates that demand remains strong in the UK staycation market, and international and business travel is rebounding. We note that these fortunes haven’t necessarily been evenly distributed, with the upscale segment performing strong and the budget sector seeing weakened demand.
As per our last update, the sector continues to face ongoing cost pressures as the industry is still dealing with elevated staffing costs owing to the increase in employer National Insurance Contributions and the National Minimum Wage increase which took place in April 2025.
The November 2025 Budget has seen the NMW increase again, this increasing by 4.1% to £12.71 per hour from April 2026, which will elevate staff costs even further and put further pressure on profit margins.
In the November 2025 Budget, the government also confirmed that mayors across England will be given new powers which would allow them to introduce a ‘hotel tax’ in their cities. Similar schemes have already been enforced in popular European tourist destinations such as Paris and Barcelona, as well as in other major global destinations like New York City. However, these cities also charge a significantly lower rate of VAT for hospitality, which would not be the case in England. Brits took more than 89 million overnight trips in England in 2024 and stayed for a total of 255 million nights, according to Visit Britain. Analysis from UK Hospitality shows that the tax could hit Brits with up to £518m in additional tax, making holidays in England more expensive, with costs passed directly on to consumers and fuelling inflation. If set at the level of the Edinburgh visitor levy of 5%, it would create an effective 27% VAT rate for consumers on their holidays, making it one of the highest in Europe, with UKHospitality fearing this would result in consumers holding back on spending on overnight stays.
Another area of industry concern from the Budget is the personal tax thresholds being frozen for a further three years and pulling more people into higher tax brackets, likely resulting in household disposable incomes coming under greater pressure and further weakening domestic tourism demand.
The sector did however see some welcome respite in one area of the Budget, with “permanently lower business tax rates” for more than 750,000 retail, hospitality and leisure properties
Another area of industry concern from the Budget is the personal tax thresholds being frozen for a further three years and pulling more people into higher tax brackets, likely resulting in household disposable incomes coming under greater pressure and further weakening domestic tourism demand.
The sector did however see some welcome respite in one area of the Budget, with “permanently lower business tax rates” for more than 750,000 retail, hospitality and leisure properties, this set to be funded through higher rates on other forms of commercial property. Whilst lower business rates are good news for parts of the industry, larger owner operators will see limited benefits from these measures.
Regarding capital markets, transactional activity in 2025 has markedly shifted from large portfolios to single-asset deals, driven by a new, more diverse mix of domestic and international capital.
After 2024’s portfolio-driven boom (led by US Private Equity), 2025 has seen a market rebalancing. H1 2025 volumes were subdued, but Q3 saw a rise in activity, almost entirely driven by single-asset deals.
The buyer pool has diversified with domestic owner operators the most active group, as they strategically expand their platforms. International asset managers are re-entering the market, targeting value-add opportunities where they can actively manage assets to improve profitability, while family offices and HNWIs continue to target trophy assets in London and key regional locations.
The market's direction in the year ahead will be a tug-of-war between persistent headwinds and resilient demand.
