A robust outlook for European travel is expected to drive hotel trading in 2016 and 2017, but after an exceptional 2015 the revenue growth will be weaker, according to PwC’s latest European hotels forecast*. 2015 saw a bumper year as record tourist arrivals propelled hotel performance for many European destinations. City trips remain a top travel growth segment and strong demand and weak supply growth meant many hoteliers enjoyed a remarkable year in 2015 and will continue to do so in 2016.
The majority of cities included in the forecast, all bar Brussels and Milan, are expected to achieve revenue growth in 2016 and almost all cities should see additional growth in 2017 - with the exception of Geneva and Rome.
In 2016, the top cities by revenue per available room (RevPAR) growth, in local currency, are Rome (19.2%), followed by Dublin (9.1%) and Prague (6.6%), then Madrid (5.8%), Lisbon (5.7%), Porto (4.5%), Moscow (4%), Barcelona (3.3%) and Berlin (3.1%).
In 2017, in local currency, Dublin (8.2%) is forecasted to top the RevPAR growth league, followed by Lisbon (6.9%), Porto (5.8%), Barcelona (5.5%), Prague (4.9%), Milan (4.1%), Moscow (3.9%), Madrid (3.8%) and Frankfurt (2.9%).
Growth is being driven by a combination of average daily rate (ADR) and occupancy growth. For Rome, 2016 should see very high occupancy and ADR growth with the draw of the Holy Year propelling Rome’s RevPAR with an expected 25 million visitors and pilgrims, however this creates difficult comparatives for 2017. In many top performing cities like London, Dublin, Edinburgh or Amsterdam which operate at high occupancy levels, it’s ADR driving the most growth.
Commenting on what’s driving growth, Liz Hall, head of hospitality and leisure research at PwC, added: “The results overall are very impressive. Many of the cities featured are mature gateway cities and global leaders in trading performance. The growth also reflects the continued search for safer and good value destinations as the turmoil in North Africa continues.
“Growth in the travel and hospitality sector is expected to continue to outpace the wider economy, all helped by the weak euro. So far European travellers have only seen modest air fair price reductions as a result of the fall in oil prices – 2016 could herald even better news.”
Occupancy league table
In 2016, occupancies are forecast to be above 80% in three cities – London (82.9%), Dublin (82.3%) and Edinburgh (81.8%). In 2017, Edinburgh is set to overtake Dublin – the top 3 cities will be London (83.5%), Edinburgh (82.5%) and Dublin (82.4%). Higher occupancy levels reflect a structural shift towards more branded budget hotels in some countries as well as access to online distribution channels combined with greater propensity to travel.
Highest ADR (€)
In 2016 the most expensive city is Paris (252.5 euros) with Geneva (246.8 euros) dropping to second place, followed by Zurich (219.2 euros); London (202.2 euros); Rome (156.5 euros); Amsterdam (133.9 euros); Barcelona (129.1 euros) and Frankfurt (128.4 euros).
In 2017, most cities, except Geneva and Zurich, see further ADR growth, albeit quite marginal for Brussels and Moscow. In 2017 all the top rankings remain the same as 2016. There is a huge disparity, in euro terms, between those at the top and the bottom of the table.
Highest RevPAR (€)
In 2016 Paris (193.4 euros) is still expected to keep its top position, despite only marginal ADR and occupancy gains. In second place is Geneva (169.8 euros) followed by London (167.5 euros). In 2017, London jumps into second position.
Despite the two terrorist attacks in Paris in 2015, Paris has a relatively stable tourism sector and we expect a recovery back to average trends by 2017.
Hotel investment and deals outlook
European hotel deal activity peaked in 2015 with almost a 30% increase in transaction volume year-on-year to the highest level yet at c. 21bn euros. The UK accounted for c.60% of European transaction volume in 2015, with both the largest single asset and portfolio deals being in the UK. Outside of the UK, prime markets continued to show investor demand including Germany and Spain.
Looking ahead at deal activity in 2016, portfolio transactions are forecast to continue to dominate the market, both domestic and pan-European, as hotel companies and investors look to continue to benefit from value enhancing possibilities. PwC anticipates that there will continue to be limited major single asset transactions as the supply of trophy assets continues to remain scarce. Some loan/distressed sales are forecast to be active across Europe, however we are not anticipating a large number of distressed assets being bought to the market in 2016.
Sam Ward, UK hotels leader at PwC, added: “Positive hotel trading performances are driving hotel investment markets in Europe. Deal volumes have been boosted by growing confidence and greater international investor interest. Overall, we forecast there to be continued activity in the hotel investment market in 2016 albeit slightly more subdued to the record levels achieved in 2015.”
The UK outlook
London
Our latest forecast for London in 2016 and 2017 remains cheerful despite strong headwinds, with 1.9% and 2.2% RevPAR growth respectively in each year. This lifts RevPAR to £120 in 2016 and to £122 in 2017. We expect growth to be driven by a balanced mix of occupancy and rates. Occupancy growth of 0.9% could take occupancy to 83% this year and an ADR gain of 1%, takes rates to £144. With occupancy already at 83%, we anticipate only a further 0.7% gain keeping occupancy at 83% in 2017. Above average supply growth continues and could potentially inflict challenges for existing hoteliers. In 2017 RevPAR growth will be driven by 1.5% ADR growth, taking ADR to £147.
UK regions
Our latest forecast for the UK regions for 2016 and 2017 is strong growth (albeit weaker than in 2014). Given the already high occupancy levels in 2015 (76%) we think hoteliers will be able to raise ADR to drive 4.2% and 3.2% RevPAR gains in 2016 and 2017. ADR growth of 3% in 2016 is expected to moderate to 1.4% in 2017 and will continue to help rates recover to a respectable £69 and £70 in 2016 and 2017 respectively. Occupancy is forecast to increase by almost 1.2% to 77% in 2016, nudging up to 78% in 2017. Growth in new supply could reach 2% this year as over 9,000 new rooms open, with a further 1.7% growth in 2017.
UK supply growth
This year will see 16,000 rooms added to UK hotel supply, this is up from 10,000 in 2015. Of these, 7,000 will open in London - more than double the figure added in 2015. For the UK regions, overall hotel capacity could expand by 9,000 new rooms in 2016, meaning a 2% growth rate, a notch higher than 2015.
Commenting on new supply in London, Liz Hall, head of hospitality and leisure research at PwC, added: “The high level of new supply could cause a headache for hoteliers in the capital. London seems to soak up new supply but competition is very much a local issue. The budget boom continues with around 3,000 new rooms in the budget category (on top of the 3,700 new budget rooms which opened in 2014 and 2015) and budget rooms comprise about 20% of all rooms in London and 33% of the rooms in the active pipeline. That’s a lot of budget rooms to fill.”
*Featuring 19 of Europe’s most important gateway cities or resorts, PwC’s 2016 forecast provides a breakdown of revenue and occupancy forecasts, opportunities driving tourism and investment in 2016 and the economic outlook for each city. The cities in PwC econometric forecast are all important gateway cities and/or business and tourism centres and some are on route to become mega cities. The 19 reflect the challenges facing other cities in Europe where position on the economic and hotel cycle is crucial and some cities are clearly better placed to grow than others.
