The future of hotels and private capital investment

Are hotels an attractive investment for private capital?

Back in May, Farrer & Co was delighted to sponsor the Private Capital Symposium at London Business School for the second consecutive year.

Marie Bates chaired a panel of Tom Boszko from Alchemy Special Opportunities LLP, James Greenslade from Savills UK and Saydam Salaheddin from Deutsche Bank - Private Bank exploring the current trends shaping the sector, shifts in deal structures and investor composition, challenges in hotel transactions, and the emerging forces set to define the next phase of investment in hospitality.

This note sets out our reflections on the opportunities for private capital investment in the hotels sector, with insights from the May discussions and our recent work advising owner, operator, and investor clients who are active in this unique asset class.

Resilience amid market challenges

Despite ongoing macroeconomic uncertainty, hotels remain a resilient and attractive asset class. Following a challenging 2023, the sector rebounded strongly in 2024, with performance up 20% compared to the 10-year average, and the panel agreed that global hotel investment volumes are projected to increase by 15–25% by the end of 2025, with recovery in the industry driven by a resurgence in tourism, robust demand for leisure and business travel, and above-inflation growth in operating performance.

Shifting investor landscape

In the panel's experience, private equity continues to dominate hotel transactions, with US-based firms accounting for around 97% of deal activity across the UK and Europe. However, the investor pool is gradually diversifying, and this broader investor base is improving liquidity and creating a more dynamic marketplace. There has been a noticeable shift as core capital (including family offices and institutional investors) are increasingly entering the space – attracted by the sector’s stability and flexibility, offering opportunities for both passive investors and those who wish to be hands-on operators.

Evolving hotel models and consumer preferences

The hotel industry is adapting to changing consumer demand by embracing new models and styles, with the majority of big brands now offering a diverse brand portfolio – catering to the needs and wants of a broad range of target guests – from functional, business, luxury, boutique, wellness-focused, extended-stay accommodations and even branded residences.

In a portfolio, the majority of assets will tend to have a clear focus, but outside of that structure, there is a growing trend of accommodating a blend of business and leisure travel, by offering versatile amenities to address both work and relaxation needs. What is appropriate will depend very much on the asset, its scale, geographical location, the local market, target guests and investment plan.

Choice of investment plans and ownership/operational models

The typical hotel asset offers a private investor a range of ways to invest and ultimately operate the assets, including:

1. direct investment (including as a joint venture), where the owner owns and operates the hotel outright;
2. the owner owns the asset, but enters into a hotel management contract with a third party who assumes responsibility for the operation of the hotel (in accordance with certain controls and parameters) which may be with or without any brand association;
3. the franchise model, being a variation on the above, where the asset is operated under a brand through a franchise agreement; or
4. the owner invests through a fund – either PE (illiquid) or REIT (liquid) – where the fund manager chooses to buy the hotel as a physical asset to then be operated and managed for profit, either by them directly (unusual) or an experienced third party management company.

Advantages of working with a third party operator

The decision to engage a third party operator (whether or not that is a brand) will come down to whether the owner can afford and has the expertise to run the asset without. For example, whether the owner has sufficient expertise in the industry already or can afford to bring in expertise from third party consultants, hire trained and experienced personnel, pay for staff to manage the operation, and inject sufficient capital investment to fit out and maintain the premises, and run the operation day-to-day.

For an owner interested in getting involved in this asset class for the first time, a third party operator is typically engaged to manage the hotel operation – a way of buying in the experience and expertise – and outsourcing day-to-day running costs of staff wages, laundry services etc, which are typically met by the operator. However, the owner will still need to provide the capital investment to properly look after and run the asset, for example to fund works. This may be readily available by the owner, or possible through third party funding. 

Advantages of working with a known brand

Separate to the ownership and operation of the hotel asset is brand involvement - another important factor which can help an inexperienced investor to break into this market.

The market is debating the advantages of partnering with a brand, and some investors are increasingly scrutinising whether brand affiliations offer real value.

Each asset, brand and owner is unique.  While a brand association will not always be important or valuable to an owner for one asset, it may be invaluable to another. The experience of the owner, amount of capital available to be invested, asset's location and uniqueness, together with the owner's future plans for the asset (particularly scalability or otherwise) will all be key factors in this decision, and – if the decision is a yes – the next decision of which brand is most appropriate to choose.

If the decision to partner with a brand is confirmed, there are two typical pathways this will follow:

1. Franchise agreement: This is where the owner is given the right to operate the hotel under a brand. The operational responsibility (including funding) will remain with the owner but must be in accordance with the terms of the franchise agreement. Such terms are typically rigid and long-term in duration, but the advantage of being able to market your asset under a brand name can be very valuable.
   
   Additionally, an amount of key money or capex is made available by the brand to fit out the hotel in accordance with its standards (eg an open lobby concept if that is key to the brand identity). This can sometimes prove a useful injection of capital for any owner (particularly where an area of the hotel is in need of refurbishment), but strings are attached in terms of the hotel design and operation, and the investment will typically be required to be paid back if there is early termination by the owner (meaning parting ways with the brand is not easy or quick).
2. Hotel Management Agreement (HMA): Traditional long-term brand franchises are becoming less common these days, but brand relationships remain key to many investors and are increasingly flexible and commercial to suit the particular asset and its market. These are typically regulated by either a bilateral or tripartite HMA (ie either between the owner and operator, or an owner, operator and brand). A large scale brand may also be willing to provide management and operational services; so aside from the pull of the name/brand, the owner may receive support in the form of the brand’s considerable head office functions (legal, accounting etc).

Whichever model is used, the decision to involve a brand, and which brand to choose, will be dictated by factors such as brand values, saturation of a certain type of brand in the local area or point of difference in the local area. It will also be dictated by how the asset might be valued in future – will it be on room rates, or occupancy levels? Will the association with the brand help the asset to command the highest room rate in the city, or will the scale of the brand's loyalty programme (and attractive price point) work to ensure that the hotel is at 100% occupancy every night?

An attractive investment? Due diligence and clear strategy are key

Post-acquisition, buyers are frequently confronted with unexpected issues — such as compliance failures or outdated infrastructure, which can stretch expertise and significantly impact budgets and timelines.

These challenges reinforce the importance of rigorous due diligence, a clearly defined investment strategy, and effective asset management from day one. Taking time to carefully consider the selection of any third party operator and/or established brand is key, ensuring visions and ways of working are aligned once the hotel is open for trading and in its future vision and operation.

As a stable asset class with plenty of flexibility in structuring and operation, hotel assets look set to remain a key target for private capital investment.  

If you would like advice in relation to any of the items mentioned in this note, please do get in touch with Antonia Lyne, Marie Bates or your usual contact at the firm.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2025