This Is The Strategy Behind Blackstone, Starwood And Ares’ £2B UK Hotel Chain Frenzy

Global private equity firms are betting big on UK hotel chains in 2024. And with Blackstone, Starwood and Ares dropping £2B on three deals alone, the big questions are what is sparking so much interest in UK hospitality and whether the current dynamism in the sector is set to continue.

“It probably feels like a frenzy, given the really quiet period that we had [from 2020 to 2023], but hopefully this isn't a frenzy that's going to drop off,” Starwood Capital Senior Vice President of European Hotel Asset Management Chris Penny said at Bisnow’s UK Hotel Outlook event. “Hopefully this is a bit more of a sustainable trend.”

Penny and executives from Blackstone and EQ Group, Ares’ JV partner on a £400M deal, spoke at the new Park Hyatt London River Thames Hotel in south-west London about the rationale behind some of the largest real estate transactions this year — not just in the hotel market, but in any real estate sector — and what investments are in store for the rest of the year. 

In January, Starwood announced the £800M acquisition of 10 Radisson Blu hotels from Edwardian Group, a deal that followed about 18 months of discussions with the family-owned seller. 

Winning investment committee approval for the deal was far from easy, Penny said. But once that happened, it was possible to bridge the gap between what Starwood was willing to pay and a price the seller felt was fair.

“In the middle of 2023, when we were discussing that with our U.S.-based investment committee and the trajectory of interest rates was still up, there was a lot of pushback,” Penny said. “‘OK, you're going to invest a lot of money into a cyclical market that's dependent on consumer spending whilst discretionary spending is being squeezed — are you really sure this is a good idea?’” 

Yet it was “such great real estate at what we thought was a fair price” that it was too good an opportunity to pass up, Penny said, pointing to the need to find committed sellers in a market that is uncertain about pricing to get deals done. 

Four months later, Ares struck a deal to buy 21 hotels for £400M from Landsec that the UK REIT considered noncore.

EQ Group Senior Managing Director and co-founder Namid Mangalji talked through the complexities of the deal and how the JV is looking to add value to its acquisition. 

“It was a very complicated transaction. I’ve probably got the most grey hair on this panel,” Mangalji said. “We started this process about a year and a half ago, but it was very complicated because we were buying 21 assets noncore from Landsec, which were all encumbered by leases from AccorInvest, which were further encumbered by management agreements with [the hotel operator of which AccorInvest is a hotel investment subsidiary] Accor SA.”

The acquisition began a process of rationalising the leasing and management structure of the portfolio to increase value. The JV passed three hotels to AccorInvest to collapse the leases and simultaneously negotiated with AccorSA to convert all of the hotels from management to franchise agreements while also taking on a handful with vacant possession.

“The value-add across the portfolio chain is fantastic,” Mangalji said. “You've got marriage value from operations and freehold combining the two. You've got value-add from converting from management to franchise. And then, on the asset management side, we're seeing tremendous opportunity. Once you get hold of the operations, you’re able to drive value.”

In the most recent big hotel deal, Blackstone bought the 33-hotel, 4,400-room Village Hotels chain in June from fellow private equity firm KSL Capital Partners for a price reported to be £850M.

For Blackstone, a major part of the deal was leveraging the brand and business model that Village has built up.

“What was interesting about Village is that it's a fantastic business and has a unique business model where you have the hotel operations, the fitness, and the food and beverage all under one roof,” Blackstone Senior Managing Director Michael Swank said at the event. 

“It's a branded business. It’s very well known here in the UK. It has a very loyal following, and we think it has legs to continue to grow,” Swank added. “The management team is fantastic. They and KSL, the prior owner, did a wonderful job building that business and that brand over several years. But we think it was a perfect time for us to come in and take it on its next leg of growth.”

There is the potential to bolt additional sites on to the Village business, Swank said. 

Looking forward, total investment volume for the UK hotel market is predicted to reach £5B, according to Knight Frank. While it is unlikely there will be as many megadeals in 2025, the hope is that smaller transactions will start to pick up. 

“We have a lot more deals agreed and exchanged versus a year ago. We're about 60% up,” Christie & Co Managing Director of Hotels Carine Bonnejean said. “We’re seeing a lot more new instructions, bigger lot sizes, mostly individual assets, [and] I would say probably more on the core, core-plus side than the value-add.”

Panellists said that is the next evolution the market needs to take. While private equity firms looking for higher returns have been keen to dive into the market, institutions looking for lower, safer returns and willing to pay a higher price for them have been thinner on the ground. 

“There will be more buyers for any given transaction, but whether there are a lot of sellers that are willing to actually sell something, that's a different story,” Swank said.

“And I think that comes back a little bit to the comments that have been made about core, core-plus capital. I think we'll start to see more come back, but I don't think it's going to be a flood overnight.”