Hotel Update
After a mixed year in 2025, the UK hotel sector has seen a tough start to 2026, with top-line demand largely flat against last year whilst increased operating costs have chipped away at operating profits.
As per our last update, the sector continues to face ongoing cost pressures both from staffing costs due to the increase in National Minimum Wage, the rise in business rates, and now more recently from energy costs owing to the ongoing conflict and persistent tensions in the Middle East. Due to its high energy dependency, the hospitality sector is set to experience a more pronounced increase in operational overheads compared to other service industries.
Simultaneously, inflationary pressure on households is eroding disposable income. Coupling this with a generally weaker macro-economic outlook and consumer sentiment, will possibly lead to a contraction in domestic leisure demand, particularly within the 'squeezed middle' demographic. However we may find that whilst the Middle East conflict continues to impact fuel prices, suggestions that we may see aviation fuel shortages could potentially counteract this and increase staycation bookings. We also expect to see the recovery of business travel dampened once more, owing to the increase in travel costs and wider business operational costs.
With regards to capital markets, UK hotel investment volumes reached £5.0 billion in 2025, representing a 15% year-on-year softening, while remaining closely aligned with longer-term market trends. The market has seen a notable structural shift towards single-asset transactions, which accounted for circa 85% of investment volumes in 2025, up circa 65% year-on-year. Portfolio transaction volumes declined significantly from 2024.
Looking ahead, prior to the conflict in the Middle East, the market had been anticipating improving transaction volumes over the year ahead with continued solid single-asset activity coupled with greater portfolio volumes. More quality stock is becoming available from assets reaching the end of their investment life cycles and break-up sales from large 2024 portfolios.
With construction costs set to remain elevated, the pipeline of new rooms (under construction or in final planning) is less than pre-pandemic levels. Supply growth is expected to remain relatively flat in the coming years, reducing the risk of new supply offsetting future demand gains.
We are of the view that we may see the full breadth of stakeholders in the hotel market, from consumers to operators and investors, hold their breath and adopt the ‘wait and see’ approach whilst the current geopolitical situation plays out before making any major decisions.
