UK hotels: resilience, repricing and a fragmented outlook

The UK hotel market enters the second half of 2026 with a familiar mixture of resilience and uncertainty. Demand has held up better than might have been expected against a more difficult geopolitical and economic backdrop, but the pace of growth has slowed. The market is no longer moving in one direction: performance is increasingly being shaped by location, customer profile, hotel class and an operator’s ability to protect margins.

This matters for investors as much as it does for operators. Stable demand and a constrained development pipeline continue to support the case for the sector, while higher costs, changing financing expectations and wider bid-ask spreads are keeping underwriting selective. Rather than a broad-based recovery, the next phase is likely to be more fragmented, with the strongest assets and destinations continuing to pull away from the rest.

Demand remains resilient, but growth is normalising

Despite disruption associated with events in the Middle East, travel demand has remained resilient. UK airports have continued to record solid passenger volumes during 2026, although growth has softened compared with forecasts made prior to the escalation of geopolitical tensions. Heathrow, the UK's largest airport, handled 40 million passengers in the first six months of 2026, 0.2% more than the same period a year earlier, demonstrating that demand has remained stable despite disruption on some long-haul routes. The expectation remains that 2026 could be another resilient year for air travel, although passenger volumes may finish below earlier projections. Domestic travel also remains supportive, with meetings, incentives, conferences and exhibitions helping to underpin performance in a number of regional markets.  

After the strong post-pandemic rebound, hotel trading growth is beginning to moderate. Over the last 12 months, occupancy and room rate growth have both slowed, pointing to stable underlying demand but also suggesting that the easiest gains from the recovery period have largely passed. 

The national picture also masks a widening gap between different parts of the market. Luxury hotels, particularly in London, continue to outperform, supported by guests who are less exposed to price pressure and by the capital's enduring appeal as an international destination. Pricing power remains strongest at the top end of the market, while more price-sensitive segments and some regional markets are seeing flatter performance. Performance is therefore becoming increasingly dependent on location, customer profile and positioning, a trend that is likely to become a lasting feature of the market rather than a short-term anomaly.

Source: Avison Young/Costar

Cost pressures are changing the operating model

Stable demand does not automatically translate into stronger profitability. Rising labour costs, energy costs and higher business rates are placing pressure on operating margins. For many operators, the central question is no longer simply how to raise room rates, but how to preserve profitability in an environment where several major cost lines have reset at a higher level.

Technology remains an important part of the solution. Operators continue to look for practical ways to streamline processes, improve productivity and make better use of data. This can help improve booking conversion, personalise the guest experience and support more responsive pricing strategies. However, investment needs to be carefully targeted. Not every system will be appropriate for every property, and success depends as much on effective implementation and staff adoption as it does on the technology itself.

Hoteliers are also revisiting how space is used. Underutilised areas are being adapted for short-term rental opportunities, meetings, co-working and other flexible uses. Food and beverage, events and ancillary services can offer additional income, but viability depends on location, customer demand, building configuration and the operator’s ability to deliver the offer consistently. The most successful strategies are likely to be property-specific rather than copied from a standard model.

A constrained pipeline is supporting existing hotels

The development environment remains challenging. High construction and financing costs continue to affect the viability of new schemes, contributing to a measured pace of new supply even where demand remains attractive. While new hotels are still being delivered, development activity remains selective. For existing hotels, this helps limit the risk of a significant increase in competing rooms. For developers, however, it increases the importance of planning certainty, procurement discipline and a clearly defined market position.

Conversions continue to offer an alternative route to new supply, particularly in major cities such as London and Edinburgh where suitable development opportunities can be limited. Repurposing an existing building can provide an alternative to ground-up development, although conversion projects carry their own risks around layout, servicing, heritage constraints, sustainability performance and cost certainty.

Source: Avison Young/Costar
The composition of the pipeline is also evolving. Higher-end hotels continue to account for a significant share of development activity, with luxury, upper-upscale and upscale projects well represented across the pipeline. However, development is not confined to the premium end of the market. Upper-midscale, midscale and economy hotels also account for a substantial proportion of new supply, reflecting continued expansion by brands such as Premier Inn, hub by Premier Inn and Hampton by Hilton.
Source: Avison Young/Costar

The trading outlook for the rest of 2026

For the remainder of 2026, the central expectation is that UK RevPAR will be broadly flat year-on-year as domestic economic pressure and geopolitical uncertainty continue to weigh on performance. That national picture is likely to conceal meaningful variation. Destinations with strong leisure demand, a full events calendar or a distinctive visitor offer should be better placed, while markets that depend more heavily on price-sensitive customers may find it harder to grow rates.

London is also expected to be relatively flat overall. One risk is that disruption to routes through the Middle East may encourage some long-haul travellers to holiday closer to home. Even so, luxury hotels should continue to perform well, reflecting both the strength of the capital’s top-end offer and the greater spending resilience of its customer base.

Hotel investment is strong in the first half of 2026, but buyers are selective

The UK hotel sector remains one of the more liquid parts of the real estate market. Pricing can adjust more quickly than in many traditional property sectors because investors are underwriting both the real estate and the operating business. At the same time, a mix of domestic and international capital continues to support demand for assets with a compelling trading story. A reflection of this is in yields which have widened by 10bps over the last quarter as bond yields increased.

Investment activity has strengthened significantly during 2026. UK hotel transaction volumes reached £2.5 billion in the first half of the year, representing a 75% increase on the same period in 2025 and 43% above the 5-year H1 average.

Source: Avison Young/Real Capital Analytics
London was the primary driver of activity, accounting for £1.7 billion of transactions, or 69% of total UK volumes. The capital also continues to attract significant overseas interest, with 74% of investment activity originating from international investors.

London Buyer Composition:

Source: Avison Young/Real Capital Analytics

The return of larger single-asset transactions suggests that pricing expectations between buyers and sellers are beginning to align more closely. However, pricing adjustment remains incomplete in some parts of the market. Participants continue to report bid-ask spreads that remain wider than expected, meaning liquidity is concentrated around assets where investors have confidence in the strength of income, operational performance and long-term exit prospects.

As a result, well-located hotels in major cities, particularly those with strong trading fundamentals and clear asset management opportunities, continue to attract the deepest pool of capital. Investors remain selective, but confidence in the long-term outlook for the sector is improving.

Budget hotels and branded income are attracting capital

Smaller portfolio transactions have been an important driver of sales. Operators looking to expand in a difficult construction market have been particularly active, using acquisitions and conversions as an alternative route to growth. Examples include Travelodge’s acquisition of nine former Campanile-branded hotels totalling 951 rooms, followed by four ibis hotels adding a further 324 rooms (both at an undisclosed price).

Budget hotels have also accounted for a significant share of investment activity this year, attracting interest from a broad range of domestic and international buyers. French investment fund Iroko Zen and UK real estate investment trust LondonMetric Property have both been active in the sector, reflecting confidence in the long-term fundamentals of branded economy hotels. While trading growth may be more subdued in parts of the budget market as consumers remain price-conscious, investor appetite has remained strong. Buyers continue to be attracted by the defensive characteristics of branded economy hotels and the security offered by established operators.

Those defensive characteristics stem from a combination of long leases, recognised operators and exposure to demand generated by both leisure and business travel. In an environment where income security remains a key consideration, branded budget hotels can provide an attractive balance of stable cash flow and operational resilience.

A recent example is LondonMetric Property's acquisition of five Premier Inn hotels from Whitbread in a sale-and-leaseback transaction. The portfolio comprised 446 rooms and was acquired for approximately £44 million, equating to around £99,500 per room and reflecting a net initial yield of 5.24%. The transaction highlights the ongoing appeal of well-covenanted hotel investments and demonstrates how investors continue to target assets that can deliver secure income alongside exposure to the sector's favourable long-term demand drivers.

Financing and the macro backdrop

Financing conditions remain central to the investment outlook. For hotel investors, higher inflation and borrowing costs affect both sides of the equation. They can place pressure on consumers and operating margins, while also increasing the return required by equity and debt providers. Lenders are nevertheless reported to be competing for strong opportunities, particularly where sponsors have capital, experienced operating partners and a clear business plan.

More assets could come to market

The next 12 months could bring an improvement in deal flow. Potential portfolio sales include Malmaison and Hotel du Vin, and a Marriott Moxy portfolio associated with Vastint, each estimated at around £500 million.
 
Beyond the larger portfolios, owners are reassessing estates and may bring non-core assets to market. That could improve the range of opportunities available, although execution will still depend on realistic pricing. The market’s cautious optimism therefore rests not only on the volume of capital available, but on whether sellers are prepared to meet buyers at levels that reflect current financing and trading conditions.

A more divided market in 2027

Looking into 2027, hotel performance is expected to become increasingly K-shaped. Luxury hotels should remain comparatively resilient, while more price-sensitive parts of the market are likely to remain exposed to household budgets and consumer confidence. However, the divide is not only between hotel classes. Destinations with strong leisure demand, a compelling visitor offer and international appeal are also likely to outperform markets that rely more heavily on domestic and price-sensitive demand. Inbound tourism is expected to deliver moderate growth, particularly for city-centre locations, and constrained new supply should continue to benefit established hotels.

Costs may begin to settle, but that outcome remains heavily dependent on the wider geopolitical and economic environment. Operators will still need to focus on productivity, procurement and the quality of the guest proposition. Investors, meanwhile, will need to distinguish between assets that are merely benefiting from restricted supply and those with a durable competitive position.

What this means for owners, operators and investors

The hotel market is not short of demand, capital or opportunity. What it lacks is uniformity. The assets best placed to succeed will be those that combine a strong location with a clearly defined customer proposition, disciplined operations and a realistic capital plan. Luxury and well-located city hotels should continue to attract attention, while branded budget hotels remain relevant to income-focused buyers. Between those poles, performance will depend on how effectively each property responds to its local market.

For owners, this is a moment to test whether space, brand and operating model are working hard enough. For operators, margin management will be as important as revenue growth. For investors and lenders, the opportunity lies in identifying assets where constrained supply and resilient demand can be translated into sustainable cash flow rather than relying on a broad market uplift.

The outlook is therefore cautiously positive, but selective. Deal flow could improve, existing hotels should continue to benefit from barriers to new development, and the strongest parts of the market have room to outperform. The next phase will reward evidence-led decisions and a clear understanding of the differences between locations, segments and operating models.