Savills predicts 3.9% capital growth in London hotel sector

Real estate advisor Savills has predicted a 3.9% capital growth increase in London's hotel sector this year with the Olympics boosting operational performance and the Queen' s diamond jubilee bolstering domestic tourist demand.

The firm anticipates overseas investors will continue to focus on London’s four and five star market and be the major driver for this sustained growth in values.

Investment in the sector totalled £1.5 bn in 2011, according to Savills. Despite a 39% reduction in overseas investment, foreign investors drove trophy asset value growth by 6.8% - the highest of any sub-sector. Yields for prime UK hotels have held at 6.5% since February 2011, 95 basis points above UK prime yields.

Robert Seabrook, Savills joint head of hotels, said: 'The biggest single challenge facing investors in the UK is the lack of debt. This, coupled with declining trading performance, is leading to a significant repricing in the regions while the weight of overseas capital focused on London is driving pricing higher, particularly in the trophy end of the market.'