London hoteliers saw a record 2014 but so far 2015 hasn’t replicated this stellar performance, according to new PwC analysis. While average performance metrics are still very high by most global city standards, the pace of growth in London in the first half of 2015 has been mixed. Demand is still strong but the falling Euro is a key issue.
Overall for 2015, PwC expects London to see occupancy growth of 1% taking occupancy to 84%. ADR growth is forecast to be 1.8%, taking ADR to £142. The increase in occupancy and ADR is partly due to the Rugby World Cup in the second half of 2015. This drives RevPAR growth of 2.7%, taking RevPAR to £119.
Looking ahead to 2016, we forecast more growth but at a slower pace with marginal occupancy growth of 0.3% that will keep occupancy at 84% and a 2.2% growth in ADR which will mean rates of £145. This combination will drive RevPAR growth of 2.3% to take yields to £122.
Liz Hall, head of hospitality and leisure research at PwC, said: “London occupancies have averaged 80% or above since 2006 and our annual forecast for 84% this year and next would be the highest this decade.
“Growth isn’t being experienced evenly by all market segments. The recent variable performance in London in the first half of 2015 has shown some polarisation in performance with the middle segments hurting the most. Is the increase in budget rooms upsetting the apple cart in London and creating this middle market squeeze?”
The regions
The regions have experienced a very good-year-to-date. Around the country, most cities have continued to see very strong RevPAR growth. Growth has come from a mix of occupancy and ADR, but particularly from rates. Exceptions include Aberdeen, which has seen both occupancy and ADR falls drive an 18% RevPAR decline to June. Many cities continue to see double digit RevPAR growth, including Belfast, Bristol, Birmingham, Coventry, Liverpool, Nottingham, Plymouth and Southampton.
Overall strong trading and low supply mean that for 2015 PwC expects 1.6% occupancy growth, taking occupancy to 76% and ADR growth of 4.6%, taking rates to £67. This mean RevPAR growth will be 6.3%, nudging RevPAR to £51.
Liz Hall, head of hospitality and leisure research at PwC, added: “Growth is still in the air and there is more to come, but the pace of growth is slowing a bit now in the regions. This is not surprising, we have seen 32 months of occupancy growth. UK occupancy levels are at record highs with ADR heading in the right direction in the regions. It’s getting harder, but even slower growth is a good result for hotels.”
PwC forecasts further growth in 2016, but just not at the same pace with a 0.6% gain taking occupancy to 77%. ADR growth is predicted to fall to 3.5%, taking rates too£69. This means RevPAR growth of 4.2%, taking RevPAR to £53.
The Rugby World Cup – up or under?
The Rugby World Cup starts this month and will provide a fillip for UK hoteliers. The event will be held across the country in Birmingham, Brighton, Exeter, Cardiff, Gloucester, Milton Keynes, Leicester, Leeds, Newcastle and Manchester as well as London. With a third of matches set to be played on a Sunday - traditionally a low occupancy night - the event is a great opportunity for hotels, although, there are fears the event could put off the corporate market at a traditionally busy time.
The rise and rise of shared space
The rise of shared accommodation platforms for business and leisure has meant more travellers are aware of the brands and the opportunities of experiencing staying in shared space.
Liz Hall, head of hospitality and leisure research at PwC, added: “In London, the numbers of Airbnb listings are increasing and this trend is likely to continue and cause localised issues for hotels, around pricing pressure and/or underutilisation, especially for undifferentiated products. Such an impact is likely to be felt more strongly by hotels in a downturn.”
Looking ahead, it will be interesting to see how much of a threat sharing economy platforms pose to hotels and if shared platforms will take the ‘cream off the milk’ at the times of peak demand. Like the branded budget hotels 30 years ago, will rental sites create a new stream of demand for destinations and allow hotels to capitalise on a new type of customer.
2015 to set new record for UK deal activity
Deal volume has increased exponentially in 2015 and is forecast to reach £10 billion. Year to July 2015, we have already seen £6 billion of transactions, marginally ahead of 2014’s total volume. Regional transactions have been the most active, where both continued RevPAR growth and reduced inflation pressure on operating costs are resulting in improved profitability. Despite London RevPAR growth of only 2.7% forecast in 2015, demand from investors remains high; however a lack of supply has meant few major transactions year-to-date.
Looking ahead to deal activity in 2016, Sam Ward, UK hotels leader at PwC, said: “We forecast total deal volume to remain above previous peaks (albeit behind the record level forecast for 2015) with continued activity in the regional portfolio market in particular. It remains to be seen, however, whether the currently perceived property bubble could burst, leading to a retraction in the number of planned hotel deals to come.
“One of the factors driving deal growth is the strong demand from overseas investors for prime London assets, which offer reasonable returns for relatively low risk. We have also seen an increase in overseas demand for assets outside central London as market performance improves and investors look to achieve greater returns on investments.”
David Trunkfield, hospitality and leisure leader at PwC, concluded: “UK hotels continue to benefit from the improving economic and travel backdrop. So far this year, the pace of growth has been variable in London but dynamic in the Regions, driving a bumper year in the investment market. Hoteliers still faces plenty of challenges and geopolitical uncertainty. New products and business models can sometimes represent a challenge for existing businesses. Every so often a new trend has the potential to change the established way of doing business and can leave some businesses ill prepared for the new order.”
