Private capital; ESG and diversification: Trends in M&A and Investing in the UK Hotels Sector 2025
The general outlook for the hotels sector remains challenging in 2025 but largely positive. In light of the increase to National Insurance Contributions and the National Minimum Wage outlined in the Autumn Budget 2024, the UK Hotels market is facing a significant uptick in operational costs. The sector, which is labour-intensive and often employs a large number of staff at minimum wage levels, is particularly susceptible to these changes. Moreover, the anticipated revaluation of business rates in the coming year is set to impact hotels considerably, given their substantial property footprints and prime locations. With the hospitality industry still stabilising from the lingering effects of the pandemic, these financial pressures are compounded.
In addition, hotels are also preparing for the introduction of new regulatory measures including the Employment Rights Bill (due to come into force in 2026). The Employment Rights Bill is set to bring profound changes to the UK hotels sector, known for its high staff turnover and flexible employment contracts. The Employment Rights Bill’s enhanced worker protections, including increased leave entitlements and increased regulatory burdens on employers relying on zero-hours contracts, will challenge the sector's operational norms and could significantly inflate costs for hotels accustomed to lean margins. These legislative shifts will require a thorough reassessment of employment practices in an industry where flexible working is often a key component of the business model.
Additional measures aimed at sustainability and consumer protection are also imminent. These include stricter environmental standards for buildings and waste management, as well as enhanced customer data protection requirements, all of which necessitate further investment. As such, hoteliers are exploring innovative cost management strategies, from investing in energy-efficient technologies to streamlining operations through digitalisation.
The convergence of these economic and regulatory factors means that the UK Hotels market must not only brace for an increase in direct costs but also for the indirect costs associated with compliance and adaptation to new standards. This environment demands agility and foresight from hoteliers, as they balance cost management with the imperative to maintain high standards of service and guest experience in a highly competitive market. With these challenges in mind, we are looking towards the 2025 M&A market in this sector with cautious optimism. In particular, we’re expecting three trends to be on everyone’s radar in the M&A and investment space this year: the continued focus on private capital investment, ESG and diversification to enhance revenue streams.
Private capital investment
We found that there was a strong focus on the hotels sector from private capital investors throughout 2024, despite challenging economic conditions. Hotels are uniquely placed for private capital investment and family businesses, as they can offer more flexibility than other real estate investments, and can be more responsive to demand and market conditions.
Moreover, the UK hotels sector has seen a shift towards more innovative and experiential offerings, with private investors showing a keen interest in boutique and lifestyle hotels that promise unique guest experiences. This is in line with a broader consumer trend that favours personalised and authentic travel over generic accommodations. Private capital has been instrumental in refurbishing and rebranding existing properties to align with these contemporary consumer preferences. Additionally, the rise of 'staycations' among UK residents has bolstered the domestic market, further enticing private investment into the sector. As a result, we are witnessing a diversification of portfolios, with investors not only targeting London's premium properties but also exploring opportunities in regional cities and picturesque countryside locations, which are experiencing a renaissance of their own.
As the sector continues to evolve throughout 2025 and beyond, the role of private capital will be pivotal in shaping its trajectory, ensuring that the UK remains at the forefront of hospitality innovation and investment attractiveness. As a Firm, we have an abundance of private capital investment experience and earlier this year co-leads of our Hotels Group, Naomi Nettleton and James Broadhurst, were joined by David Orr, CEO of Resident Hotels, to discuss private capital investing into hotels, and hotels as multi-generation family businesses, on our podcast, Property Patter.
Environmental, Social and Governance drivers
ESG considerations are becoming increasingly pivotal in the UK investment and M&A landscape, and the UK hotels sector is no exception. Investors, particularly private equity firms, are integrating ESG factors into their decision-making frameworks, and focusing on investments that have strong ESG practices. This heightened focus on ESG is driven by increased regulation (whether directly or indirectly applicable) as well as a recognition of the long-term value and risk mitigation that sustainable practices offer. As the industry navigates a more environmentally conscious consumer base, investments that demonstrate robust ESG credentials are not just ethically appealing but are also becoming a business imperative.
In response to the growing ESG trend, hotel owners are exploring various strategies to enhance their sustainability profile. Improving the condition of existing assets to meet higher environmental standards is one approach, while ensuring new builds are designed with energy efficiency and environmental impact in mind is another. These initiatives are not only about meeting investor and consumer expectations but also about future-proofing assets in a market that is increasingly regulated by sustainability criteria.
Moreover, the concept of 'In Country Value' (ICV) is gaining traction in the hotel agreements, reflecting a holistic approach to ESG. By incorporating ICV provisions, hotel owners and operators are obliged to procure a certain percentage of supplies and services locally. This not only bolsters local economies and supports small and medium-sized enterprises but also contributes to reducing the overall carbon footprint of hotel operations. The emphasis on local sourcing is a testament to the sector's commitment to the 'Social' aspect of ESG, fostering community engagement and development. The integration of ICV provisions is a strategic move that aligns with broader ESG goals, offering a clear pathway for the hotels sector to contribute positively to the local economy while simultaneously enhancing environmental stewardship.
One particular area to be aware of on the “Social” side of ESG is that hotels (and hospitality more broadly) are high risk for human trafficking and modern slavery. Relevant to this is the development of mandatory human rights due diligence regimes, especially in the EU and at a national level such as in France and Germany, which require businesses to identify, disclose and take steps to mitigate risks to people in their direct operations and their supply chains, including risks of human trafficking and modern slavery. Although mandatory human rights due diligence legislation is not imminent in the UK, we do expect amendments to the current Modern Slavery Act which will enhance disclosure requirements and penalties for companies. In light of such regulation as well as the related reputational risks, hotel businesses need to be on the front foot to ensure they are doing appropriate and effective due diligence to ideally prevent or minimise such incidents from occurring.
As the sector continues to embrace, integrate and act on ESG principles, frameworks and regulation, the impact on investment and M&A activity is significant, with a clear shift towards assets that encompass these values.
Diversification and business leisure
For our hotel clients, we are seeing their acquisition and investment strategies being increasingly shaped by the pursuit of diversification and the enhancement of revenue streams, which we expect to continue in 2025. By expanding their offerings, through bolt-on acquisitions and investments, hotels are not only meeting evolving consumer demands but also opening up new channels for revenue. In particular, the rise of 'Bleisure', a blend of business and leisure travel, is prompting hotels to adapt their amenities and services to cater to professionals who extend their business trips for leisure purposes. This trend is driving demand for versatile accommodations that offer both efficient workspaces and relaxing leisure facilities. Hotels capitalising on this trend are reimagining their spaces to create a seamless transition between work and play, thereby attracting a growing segment of travellers. These strategies not only provide businesses with new revenue streams, keep up with consumer demand, but also make such hotels more attractive to potential investors and trade buyers.
The UK continues to be a beacon of hospitality, drawing in both international and domestic travellers and investment, and as we look to the future of M&A and investment in the UK hotels sector we are very optimistic.
