The UK’s Hotel Market

London’s appeal as a global gateway city with a rich and diverse cultural offering has continued to attract visitors in record numbers to the capital. 1 In 2017, hotels in the UK enjoyed a robust trading environment despite concerns about the impact of Brexit on London’s standing as a leading global financial centre, as business travel and tourism remained strong mainly off the back of tourists taking advantage of the cheap Pound. 2 Investors in hotels have also shown confidence to invest in new hotels as well as refurbish and extend existing stock. Currently, there is a strong pipeline of proposed hotels in London and regional cities, with London accounting for 44% of the UK’s total hotel pipeline. 3

The Budget Sector Boom

Fuelled by reduced corporate travel budgets and leisure guests demanding more value for their money, budget hotels have dominated growth in the UK hotel sector. In 2017 alone, the branded budget sector is forecasted to account for 64% of all new build hotels and is expected to represent 26% of the total UK hotel supply. 3 Budget sector brands such as Premier Inn and Travelodge have continued to expand despite rising competition from Airbnb as they continue to offer competitive prices in key business and touristic locations. Budget hotels have also been quick to embrace the latest hotel technology for their guests including automated check-in and check-out options and the use of social media to attract bookings.

From a developer and investor’s perspective, budget hotel chains offer institutional grade leases, strong operating credentials, and tend to have better costs control than 4 or 5-star hotels. Hotels also rely on various revenue streams including food and beverage, conference rooms bookings and sporting amenities in golf and leisure hotels. While this diversification generates extra revenue – in some cases less than 50% of sales income are from room rates – budget hotels offering fewer services are less sensitive to the fluctuations in demand and costs for these services. 2 Especially with rising hotel operating costs due to the depreciation of the pound, budget hotels can weather the storm better.

Hotel Development

The supply of hotel bedrooms in the UK and London have been growing at Compounded Annual Growth Rate (CAGRs) of 2.4% and 3.7% respectively since 2010 – with London’s share of the UK hotel now at approximately 23%. 3 Whilst specifically new builds are forecasted to account for approximately 60% of new hotel stock, investors’ appetite has turned away from riskier developments following the vote to leave the EU and upward trajectory of development costs. Nevertheless, international investors able to take advantage of the pound devaluation, continued to show great confidence in the UK hotel market despite ongoing political uncertainty. 4, 5

Aside from the new technologies being implement for hotel guests, advances in modular construction methods have gained popularity with hotel developers in recent years. Modular construction involves a process in which individual “modules” are pre-fabricated off site, transported, and stacked and sealed on site. The process offers benefits including improved quality control, lower construction costs and reduced construction time. Developments in congested city centres with site constraints can also benefit from reduced on-site construction time.

Focus on London

While hotel development has been focussed in inner London boroughs, there is now a shift towards the outskirts of central London. The continued regeneration of the Greater London area is resulting in new emerging destinations, with a growing diversity in corporate and leisure demand. The growth of start-ups and expansion of some tech giants – such as Apple opening a new headquarters in Nine Elms – is helping stimulate demand for new hotel development. Popular emerging destinations for hotel investment and development include Aldgate East, City Airport, Shoreditch, Stratford and Whitechapel to the East of London. Much of the growth in these areas is driven by companies in the technology, media, fintech and creative arts industries. While in the West of London, the Heathrow hotel market is intensifying, with a pipeline of 8 hotels planned to open by the end of 2018, of which approximately 50% of new stock is in the branded budget hotel sector. 3

While London remains a hotspot for hotel development, it’s worth remembering that land and build costs are higher in the capital and so maximising the revenue per available room is critical to making an investment viable. As an increasing amount of capital chases limited existing hotel stock in London and other strong city-centre locations, a forward purchase agreement or pre-let agreement has become more prevalent by large hotel operators keen to secure a future presence in the market. There has also been increased interest from investors and developers in regional hotels in secondary locations with strong connectivity due to the scarcity of available sites in London, and strong regional trading performances and tourism activity. 6

2018+ outlook

Looking ahead to 2018, there is a growing market sentiment that the rate of growth in key trading performance indicators will be lower than in 2017. [2] Nevertheless, the weakened pound and the appeal of London as one of the world’s most popular destinations is expected to continue to attract overseas leisure visitors. The UK hotel sector is also expected to benefit from the resilience of the domestic “staycation” market particularly with unfavourable exchange rates expected to remain during 2018. London’s growing global tech presence is proving important for hotel investors as well, as the growth in this sector may well offset any loses in corporate travel from the financial sectors caused by Brexit.

Sources

  1. JLL, Hotel Intelligence, London, September 2017
  2. Knight Frank, Research, 2017 UK Hotel Trading Performance Review
  3. Knight Frank, Research, UK Hotel Development Opportunities 2017
  4. CBRE, Marketview Snapshot, Europe Hotel Investments Q3 2017
  5. EGi, UK hotel investment hits £2bn, 27 July 2017
  6. EGi, Opportunistic investors driving UK hotel investment volumes this year, 11 October 2017

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Daniel Levene2017-12-14T11:17:03+00:00