What is next for the UK’s £20bn hotel industry?
The hospitality industry is one of the most important parts of the British economy, with total turnover reaching £98bn in 2017 – up from £92bn in 2016 and £86bn in 2015, according to data from the Office of National Statistics.
A huge contributing factor to the hospitality sector in the UK is the hotel industry, which according to analysis by Statista generated a turnover of approximately £19.4bn in 2017.
But with Brexit on the horizon, and the Great British Pound being at a lower level than previously experienced, should hoteliers be worried moving forward and how is the market currently performing?
The capital stays strong
According to PwC’s Hotels Forecast 2019, trading growth is set to flatten in the year ahead due to economic uncertainty, weak business travel demand and an influx of new rooms scheduled to open across the country in the year ahead.
The report found that the outlook for London has levelled out with a year-on-year occupancy growth of only 0.1% and a marginal fall of 0.5% forecast for 2019, which will see occupancy levels drop one percentage point to 81% in 2019.
The research also found that Average Daily Rate (ADR) is forecast to see a marginal uplift over the next year, with 0.2% growth for 2018 .
Revenue per available room (RevPAR) growth will remain static with 0.3% forecast for both 2018 and 2019; a big contrast to the 4.6% growth in 2017.
Commenting on the latest forecast, Liz Hall, head of hospitality and leisure research at PwC, said: “2017 was a hard act to follow for hotel trading, in terms of growth and 2018 has been held back by uncertainty, slower economic growth, significant supply additions and reported stuttering business travel.
“Following a number of years of strong revenue growth, when there was not the imperative to focus on costs, prudent operators and owners need to adopt a stringent approach to operating costs growth in 2019 to preserve profitability.”
The research from PwC mirrors the findings from the 2018 London Hotel Development Monitor Report which states that the capital is set to add 11,600 rooms to its hotel market by 2020, providing business and leisure visitors planners with an even greater choice of accommodation.
Tracy Halliwell, director of tourism, conventions and major events at London Convention Bureau, said: “London is a world class destination for leisure and business travellers and it’s no surprise to see that hoteliers are showing a strong appetite for opening some of their best and most exciting properties in the capital.
“We’ve seen a number of different styles of establishments open across a range of price bands, providing even greater choice for visitors from all over the world.”
Commenting on the London hotel sector, Graham Craggs, managing director of JLL Hotels and Hospitality, added: “London is one of the most liquid markets in Europe and a popular investment hotspot for both domestic and international investors.
“The weaker pound has attracted a variety of overseas hotel operators and investors to invest in hotel real estate.
“Despite political uncertainty, investors continue to view London as a key destination.
“This is evidenced by the willingness to consider new development opportunities and the number of new hotel brands opening in the London market.”
Outlook for the regions
But what about the rest of the UK?
The findings from PwC revealed that occupancy levels in the regions across the UK have been averaging 76% since 2015 and are forecast to remain around this level for the next year, but will see a 3% decline in 2018 with no growth forecast for 2019.
ADR growth is forecast to slow compared to 2017, with an anticipated 1.3% increase for 2018. Meanwhile, RevPAR is forecast to see a 1% uplift and a further 1.2% in 2019.
Commenting on the results from the report around the regions, Liz added: “Our forecast shows RevPAR in the regions to end 2019 23% ahead of pre-recession peaks in nominal terms but lagging in real terms by 7%. Demand continues to be driven by inbound tourism, domestic holidays and events.
“Occupancy rates have been creeping up from 66% in 2009 to an average of 76% in 2015. We forecast rates to remain at this level despite over 40,000 rooms to be added in the regions in 2018 and 2019. A continuing structural supply shift towards a greater proportion of budget rooms will sustain occupancy levels.”
Regarding deal making in this sector, Brexit uncertainty hasn’t slowed down the amount of deals which took place within the hotel industry in the UK, as total deal volume in the first half of 2018 saw £3.8bn worth of deal activity; an 80% rise on the first half of 2017.
Such deals include Orchard Street Investment Management completing a £38m transaction for the 161-room Travelodge Quayside hotel in Newcastle; as well as two hotels in Cornwall – The Metropole Hotel in Padstow and the Fowey Hotel in Fowey – which were sold with a guide price of £10m and £5.5m respectively.
PwC estimates that the forecasted total deal volume will reach £6.8bn by the end of the year, a 40% increase on last year and the second highest volume of hotel investment in the UK after record levels of £9.3bn in 2015.
For 2019, deal activity is forecast to slow down with a fall of around 34% from 2018 to £4.5bn.
But what impact is Brexit having on the sector? With the UK’s impending exit from the EU set to take place on March 29, tourists from key European markets and the weaker pound mean London remains affordable for many leisure groups and compares well to competitor cities such as Paris.
This is further backed by analysis from the 2018 London Hotel Development Monitor Report published by JLL and London & Partners, which shows that the growth of the capital’s hotel market is set to outpace a number of major European cities by 2020, including Paris, Berlin, Lisbon and Milan.
Z Hotels is a fast growing independent hotel chain. On the impact of the weaker pound, its founder Bev King comments: “At this point in time, London is amazing value for money for tourists. For anyone with any other currency than the pound, London and the UK is exceptionally good value for money.
“With the pound so weak it makes it very hard for Brits to travel but it makes it very cheap for tourists to come here.
“The biggest challenge facing the industry is recruitment. With the impending Brexit and immigration changes, the hardest thing will be for hotels and restaurants to source efficient employees to supplement their workforces.
“Immigration policy is changing toward skill-based immigration and predominantly many people in the hotel industry would be considered unskilled. I think it will be difficult to find people to work in hotels, restaurants and pubs.”
What King says about immigration changing the work dynamic in this country is put into context when looking at a recent study conducted by Planday and YouGov.
The findings showed that 11% of workers (equivalent to around 330,000 staff nationally) in UK restaurants, catering, bars and hotels were thinking about leaving the UK as a result of Brexit.
Another threat to the hotel sector is Airbnb. It has revolutionised the lodging market by keeping hotel rates in check and making additional rooms available in the country’s hottest travel spots during peak periods; when hotel rooms often sell out and rates skyrocket.
This all spells bad news for hotels who have traditionally garnered their biggest earnings when rooms are scarce – meaning customers pay higher rates.
A report by Morgan Stanley found that 42% of Airbnb users have replaced a traditional hotel stay with a property from this platform.
Airbnb was founded in 2008 and has grown rapidly at a time when plenty of other industry-disrupting platforms have flourished, including Uber, Craigslist, and Spotify.
Commenting on the impact Airbnb has had on the hotel industry, Bev commented: “Black cab drivers have the same problem with Uber that the hotel industry has with Airbnb, in the fact that they’re unregulated and therefore they don’t offer the same quality and security.
“All of our hotels comply with the latest regulations in terms of fire safety, health and safety etc. But with Airbnb they don’t have any, you could be sleeping in a death trap, with no fire risk assessment, you have no idea. Properties fly in under the radar.
“How many Airbnb owners declare their earnings on their tax return every year and pay income tax?”
The issue on rates is something that the head of the Bristol Hoteliers Association (BHA) Imran Ali agrees with.
On the subject he said: “Not only do these properties not pay business rates but they lack the required level of fire, health and safety standards. I imagine as well, many landlords who still have a mortgage have not declared that they are leasing out their property to their lender and would be in breach of their mortgage agreement. Not telling your mortgage lender that you are letting out your property also invalidates your insurance.
“We’re happy for competition however it has to be on a level playing field. If nothing is done, hotels and B&Bs will suffer.
“It goes without saying that the local job market will also see a decline due to fewer services being needed. And finally, let’s not forget that the council will then start to lose income from the tax they currently receive from these legitimate businesses.”
Z Hotels founder, Bev King, has his say
In the UK, the hotel industry is classified by The Automobile Association (AA), who introduced a star rating system to classify hotels in 1912. It was in 2006 that the group developed Common Quality Standards (alongside the main tourist boards) for inspecting and rating accommodation. These standards and rating categories are now applied throughout the British Isles.
Hotels, guest accommodation, self-catering and serviced accommodation are given star ratings.
But what do the different ratings mean?
There are also individual assessments made for B&Bs and other accommodation types. While The AA’s rating system has been the standard bearer in the UK for many years, for some it doesn’t represent what customers are wanting for in rooms now.
Commenting on the star ratings, Bev King said: “I’ve met with The AA on a number of occasions because their current classification means that we don’t even rank as a one-star rating.
“At the minute, to be a one-star property you cannot have a bed against a wall and every room has to have a bath tub rather than a shower.
“However, what we do is we put beds against the wall and we don’t put any bath tubs in any of the rooms, we only have showers. So automatically all of our hotels are automatically classed as a zero star, under the AA classifications that is the case.
“In today’s world, lots of hotels don’t provide bath tubs anyway, because nobody wants a bath. Unless you’re in a resort and have a long time to relax, most people just want a shower.
“The AA classification for hotels is what was valid 50 years ago, in my opinion.”