Hotel demand slows amid price pressures in London

Hotels form a key part of the wider tourism and business traveller ecosystem in the UK. Hotels are projected to see stagnant growth in 2019, however, particularly in London, while deal activity in the space slows on changing investor priorities and Brexit uncertainty.

Foreign tourists arriving in the UK grew by 9% in volume in 2017, with almost 40 million people adding 4% in value, to close to £24.5 billion. In this record breaking year, London remained the top destination for inbound tourist spending, at 55% of the total amount, while the rest of England brought in 32%, and Scotland saw 9%, with Wales at 2%. The tourist industry employs around 2.9 million people, representing around 10% of employment, so should the sector encounter headwinds in the near future, it could have dire consequences for the nation.

New analysis from PwC suggests that such a scenario could soon become a reality, however. Exploring how the hotel industry is changing in 2018 to meet the expectations of tourist and business customers while major economic and political shifts are under way, the Big Four firm’s report has warned that price pressures resulting from Brexit and uncertainty surrounding the ease of travel could be set to derail the tourist trade in 2019.

At present, hotel occupancy rates in 2018 are projected to be stable, with growth on the previous year standing at 0.1% for occupancy in London and 0.2% in ADR in London. This is considerably down on the previous years’ ADR growth rate, however, which saw expansion of 0.2%.

A number of factors have affected growth levels in terms of total occupancy. Increased supply on the one side have reduced scope for total occupancy growth, as demand growth came in lower between 2017 and 2018 (2.2% vs. 1.8%). The hot June weather as well as some large-scale events in the UK saw visitor numbers increase at the end of H1, 2018, with a positive impact of weather and events pushing up demand into August.

The relatively slow year in 2018 is projected to continue into 2019. Forecasters see an increase in overall supply while overall demand is likely to slow further. The supply increase in regional rooms is set to be up around 3.3% for 2019, an increase of around 21,000 on the around 658,000 available rooms per night for 2018. The London supply meanwhile is set to see growth of 2.8% or around 4,300 new rooms in the new year.

The research points to further price pressures for the London and wider markets – reflecting the growth in supply, while demand is set to be relatively tepid. The firm projects Average Daily Rate (ADR) growth of 1.2% in the provinces for 2019, while for London growth is set at around 0.8%. Occupancy might even decrease in the capital. Meanwhile, revenue per available room (RevPAR) is set to be relatively stagnant, at £122 for London and £55 for the provinces in 2019.

The study found that deal activity in the space has historically reflected relative RevPAR growth. 2018, the study notes, is likely to buck the trend – in part due to a large number of portfolio and large hotel deals in H1. This level of RevPAR-beating activity was last seen in 2015. The firm notes that 2019 will likely return to relatively normal levels, as long-term investors enter the UK hotel market, as well as refinancing from large US hotel owners prior to higher debt costs. Brexit uncertainty too will see investors hold deal activity, with overall deal value falling 34% on 2018’s £6.8 billion to around £4.5 billion.

Commenting on how hotels are hoping to reposition themselves to insulate against these issues, Samantha Van Leeuwen, Head of Hotels and Venues, PwC, said, “Hotels are extending portfolios so they can win the traveller loyalty across their entire hotel lifecycle – moving from economy, select service, long stay, home share, and boutique to luxury… they want you to never leave…”