London hoteliers spy recovery as occupancy rates hit new highs
Wednesday 3, March 2010
As economic turbulence seemingly subsides the UK hotel industry, led by London, has sighted its first glimpse of growth.
Despite a RevPAR decline of almost 10% in 2009, the PwC report forecasts growth of over 3% this year and nearly 5% in 2011.
This is attributable to a 1.8% average room rate (ARR) increase and 1.3% occupancy growth in 2010. As occupancy continues to improve (with a further 1.7% increase) ARR growth will step up to 2.9% next year.
Robert Milburn, UK Hospitality & Leisure leader, PricewaterhouseCoopers LLP, said:
"Visibility is limited but reports of higher levels of transient visitors, more group conference bookings and a return of the business traveller (albeit slow) are all positive - especially for London."
"Growth in the UK hotel industry reflects the Capital’s resilience to the recession. We think the worst is over and London looks set to build on its flourish in late 2009," he added.
Blue skies for London
London has showcased five consecutive months of occupancy growth (September 2009 to January 2010) with occupancy in the final quarter of 2009 reaching 82.5% - a record Q4 high.
Over the course of the first six months of 2009 London RevPAR slid by nearly 9%. However, in a dramatic reversal, the full year ended down only 4.8%. January 2010 actuals show this trend continuing with a RevPAR gain of almost 9%.
Over the course of 2010 London should see RevPAR increase by 5.8% and a further 7.8% in 2011.
This growth spurt should provide hoteliers with sufficient volume to push up room rates by around 3.5% this year, to give an average rate of nearly £120.
Liz Hall, head of hotels research, PwC, said:
"Assuming the exchange rate remains favourable hotels will seem relatively good value for overseas visitors. More high spending, US tourists will continue the good news for London hoteliers.
"London’s supply constraints, and the cautious return of the private sector business traveller, competing with leisure guests for space, will drive room rates up."
Considerable new pre-Olympic supply kicks in during 2011 but 3.7% ARR growth remains on the cards - still sufficient to push rates to £124 next year.
Provinces temporarily beached
However, London and the Provinces seem to be navigating different channels, with the Provinces experiencing similar lows to those of 1991-1992 when the UK came out of the ERM and interest rates hit 15%.
Provincial hotels are heavily dependent on dwindling domestic corporate and leisure demand, and remain under pressure to attract new markets.
Liz Hall, head of hotels research, PwC, added:
"Occupancies should start to stabilise in early 2010 following 11 quarters of decline and room rates are forecast to start recovering from Q2 this year. Growth will be slow but it’s not all bad news with some regional centres will buck the trend."
Overall the Provinces could see 1.6% RevPAR growth in 2010 with a more solid recovery of 3.1% in 2011.
Wave of public sector pain to come
Although corporate demand is returning departmental public sector cut backs are imminent following the election – and travel and hotels will be an easy target.
Assuming a dependency of 30% of hotel business on public sector supply, cuts could shave almost 1% off the latest UK RevPAR growth projections in both 2010 and again in 2011.
Robert Milburn, UK Hospitality & Leisure leader, PricewaterhouseCoopers LLP, explained:
"Occupancy is likely to be the first casualty of any post-election cuts as travel budgets are slashed. Private sector business is also dependent on public sector contracts which could reduce the number of corporates travelling as well.
"That said 70% of those hoteliers we polled are more optimistic than they were six months ago. Group and transient business is picking up and there is hope of pent up demand for face to face meetings."
However, this embryonic recovery does not suggest a return to business-as-usual for the UK hotel sector, particularly owner operators and investors.
Robert Milburn, UK Hospitality & Leisure leader, PricewaterhouseCoopers LLP, concluded:
"As trading fundamentals have suffered and property values fallen, many mid-tier UK hotel groups now find themselves in, or close to negative equity, and will need to restructure their debt.
"More generally growth rates are not all they seem to be – any growth is off a low base and comparables are poor. The waters ahead appear calmer, but economic recovery may still falter."
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