Risks to the hotel industry

Rising costs, labour challenges and high interest rates remain the key immediate risks threatening growth in the hotel industry in 2025. Risks associated with political tension, cyberattacks and over-tourism have risen significantly this year. Executives expect growing risks for the hotel industry in the next one to three years to come from an inability to raise prices and Gen AI disruptions.

Meanwhile, non-compliance with the sustainability agenda and climate change disruptions are identified as high risks to the industry over the longer term.

 

Overview of key growth strategies

The hotel industry is embracing a multi-pronged approach to growth, driven by the need to improve resilience and efficiency and bring innovations to market. Some of the key strategies shaping the future of the sector include:

• Sustainability and climate: 65% of respondents cite regulatory compliance as the main external driver of their organisation’s sustainability strategy. Other influences on strategy include socio-economic benefits, such as becoming a circular business or adopting technologies to report on sustainability across the entire value chain of the organisation, consumer demand, and stakeholder pressure. Over three in four respondents (84%) agree that collaboration and leadership commitment are the key enablers of their organisation’s sustainability strategy in 2025. However, measuring environmental impact and translating strategies into action remain a challenge. Many respondents (40%) disagree that transitioning to net zero will be a top priority for their organisation in the next 12 months.

• Mergers and acquisitions (M&A): A surge in M&A activity is expected in the year ahead with one in two businesses (54%) saying they plan more acquisitions. The focus is on strategic partnerships or joint ventures (JVs) and acquisitions in high-growth markets and key destinations. While companies are actively managing their portfolios, transforming and reviewing assets, only one in three (33%) are expecting to make divestitures.

• Technology: Most organisations are investing in digital transformation across their business to gain efficiencies and reduce costs, including investing in data analytics (75%), digital services and products (70%), and enabling the future of work capabilities (67%). Two-thirds of respondents report that their organisation is either exploring or not yet considering AI solutions. Only one in ten organisations are currently implementing AI solutions and one in five are at the piloting stage. Our findings indicate the size of the opportunity, but also the need for a better understanding of how to implement AI at scale.

Performance in the UK market

When asked about some of the industry key performance metrics, most survey respondents (81%) say they expect a growth of one to five per cent in London’s Revenue Per Available Room (RevPAR), while 70% of respondents anticipate a RevPAR of one to five per cent in the UK regions in 2025. The results show that RevPAR growth expectations are lower for both London and the UK regions compared to last year, due perhaps to economic uncertainty, pointing to cautious optimism about the UK hotel sector's recovery.

Most respondents expect growth in Gross Operating Profit per Available Room (GOPPAR) to be between one and five per cent in both London (65%) and the UK regions (56%) in 2025. These expectations are lower than a year ago. However, last year the range of expectations across negative and positive GOPPAR growth was wider. So although expectations are lower for 2025, they now appear to be more consistent.

Executives have higher expectations for EBITDA multiples for 2025 compared to last year, especially in London, where over one in three respondents expect multiples of more than 16 times, compared to just one in five last year. This is higher than in the regions, where one in two expect multiples of 8 to 12 times reflecting the relative attractiveness of the London market. However, due to continued volatility and inflationary pressures in the sector, there was a higher proportion of undecided respondents this year.

Top 10 regional UK cities for investment

Edinburgh continues to be the most attractive city for hotel investment in 2025, for the fourth consecutive year, with Oxford retaining second place. Manchester moves up to third, while Cambridge, Bristol, Cardiff and York all drop in the rankings compared to last year.

 

UK investment opportunities

In 2025 the most attractive asset class for investment is expected to remain hotels, followed by student housing. Co-living is gaining traction, having more than doubled its appeal, compared with 2024.

When asked about the most attractive hotel chain scale segments for investment in 2025, ‘upper upscale’ (24%) and ‘luxury’ (22%) are the preferred choices, in line with the growth seen in hotels offering premium experiences. Our findings suggest that investors are seeking opportunities in segments that offer a clear value proposition and cater to specific consumer segments. Value-focused ‘economy’ hotels (17%) are the third most sought after segment, indicating continuing investor interest in both ends of the market, while ‘upper midscale’ (14%), ’upscale’ (13%) and ‘midscale’ (10%), have less appeal. These findings point to a potential shift in investor focus towards more distinct offerings, either in the upper or lower ends of the market.

 

Financing the UK hotel market

Private equity remains the largest source of equity capital for UK hotel acquisitions in 2025. After declining in recent years, private equity saw a ten percentage point increase compared to the same period a year ago, a sign of growing expected M&A activity in the sector.

Apart from domestic investors, the geographies investing most in the UK hotel sector include North America (39%), Europe (26%) and MENA (25%). However, with slowing economic activity in EMEA and China, there has been a drop in the proportion of respondents mentioning these markets as the primary sources of finance for the UK hospitality sector.

 

European investment opportunities

In Europe, hotels remain the most attractive asset class for investment in 2025 followed by branded residences. The attractiveness of hostels as an investment asset has increased by six percentage points compared to last year.

 

Financing the European hotel market

Private equity remains the main source of equity finance for European hotel acquisitions, with 36% of respondents expecting it to be the largest source of equity capital in 2025. Real estate funds and REITs are also expected to play a role, cited by 15% of respondents as the likely primary source of equity. However, financing from both sovereign wealth funds and hotel funds are expected to lose momentum in the coming year, reflecting a potential shift in investment strategies.

Traditional debt financing is regaining prominence in the European hotel market, with 54% of respondents expecting it to be the most common source of financing in 2025. Senior bank loans are also expected to gain traction, with 37% of respondents predicting their widespread use. Alternative lenders, which previously held the top spot, have lost momentum, now expected to be the primary source of debt finance by just 43% of respondents, compared to 55% in the previous year.

More than half our respondents (59%) expect finance for hotel investment to be sourced from Europe, closely followed by North America (41%) and the Middle East and North Africa (36%). The UK's contribution to European hotel investment is on the rise, with 30% of executives anticipating the UK to be a major source of funding, reflecting a recovery in economic activity. Only 4% of respondents see China as a major source of investment, and a mere 3% expect significant capital flows from India. This suggests a shift in investment patterns, with traditional western sources of investment continuing to dominate the European hotel landscape.