WHEN THE 453-ROOM INTERCONTINENTAL HOTEL adjacent to the O2 centre on London’s Greenwich peninsula opened in late January, it not only made avail¬able one of the largest (3,100sqm) pillar-free ballrooms in Europe, but also highlighted the current confidence and strength throughout the UK hotel sector ahead of its continental rivals.
At the turn of the year the UK led the way in Europe for the most hotels and rooms currently under construction – some 181 hotels and 14,121 rooms out of a Europe-wide total of 458 hotels and 60,787 rooms. Germany, according to data from the STR Global hotels consultancy, had the second largest construction pipeline in Europe: 8,369 rooms from 40 hotels being built.
Moreover, the net number of extra hotel rooms actually coming on stream this year (rather than under construction) in the UK is calculated by business consultants PWC to be around 16,500 – some 7,000 in London and 9,500 in the rest of the country, representing an increase of 4.9 per cent and 2 per cent respectively on last year.
PWC remains generally bullish about prospects for the UK hotel sector, forecast¬ing London hotel occupancy this year up 0.3 per cent to 84 per cent – the highest level so far this decade. But in the prov¬inces it could be the “highest level ever” for occupancy with 0.6 per cent growth to 77 per cent.
And investors from around the world are buying into this buoyancy: investment in UK hotels reached a nine-year high in 2015 of £8.1 billion – almost a third higher than the previous year, according to figures from property agents Savills.
NOTE OF CAUTION
But set against this upbeat picture of the health in the UK hotel market, there needs to be a note of caution. Although the UK economy continues to benefit from near-zero inflation and interest rates, as well as the second strongest (after the US) GDP growth among the G8 group of leading nations, there are still a number of uncertainties ahead which could derail demand for UK hotels.
China’s economic slowdown, for example, is creating concern about a new global financial crisis, while the pending referendum on European Union member¬ship could affect business confidence, not only in the UK but also on the continent. Plus there is the ever-present threat of terrorist attacks.
Aberdeen is a salutary lesson of how rapidly it can turn from boom to bust for UK hoteliers. The Granite City became Scotland’s oil capital in the 1970s when the massive potential from North Sea oil was starting to become reality. But it was the spike in the oil price that developed after the 2008 financial crisis – Brent Crude rose to nearly US$130 a barrel (reached in 2011) – that sparked off the speculative bout of hotel building in the city to meet demand. When the bubble burst in mid-2014, wiping US$100 or so off the oil price and leaving it languishing at around US$30 a barrel, the result was inevitable.
Aberdeen’s hotel occupancy level last December fell to 51.6 per cent, compared to 71.3 per cent for Glasgow and 80.4 per cent for Edinburgh, according to new data from Scottish consultancy LJ Research. Moreover, for Aberdeen the 16.9 per cent year-on-year fall was the 15th consecutive month of shrinking room occupancies. Not surprisingly, the average room cost in the city fell by nearly a fifth in 2015, to just over £72.
Even London, not only the premier UK hotel market but also one of the strongest in the world in terms of performance and stability, is not immune to nasty surprises. The eurozone’s financial woes last year hit occupancy levels in the first half, although the capital’s hotels were saved in the final quarter by a strong boost from the Rugby World Cup held in the UK last autumn.
Three of the 13 stadia used for the tour¬nament were based in the capital and the extra visitors who came from all over the world to watch the games pushed average London room rates in October up 7.3 per cent year-on-year to just over £160 a night, according to property consultancy CBRE. As a result, it reported that London’s hotels overall were able to post a 2 per cent increase in 2015 profitability instead of anticipated losses for the year.
Yet London’s appeal to hoteliers and investors remains strong. “London has absorbed significant new hotel supply in recent years and continues to attract serious attention from UK and international hotel groups looking to extend their presence,” points out Alan Gordon, director of hotel data consultancy AM:PM. “The footprint of the hotel market in London continues to expand and this has opened up op¬portunities in locations such as Aldgate, Shoreditch, Vauxhall and Whitechapel for new hotels, many of which are from brands making their UK debut.”
Figures compiled by AM:PM and the capital’s marketing agency, London and Partners, suggest that the London hotel room supply will grow by 12 per cent over the next three years – adding 17,769 rooms to the current figure of 138,769.
PROVINCIAL RECOVERY
Yet while London (and by association the South East) is expected to do well because of its international reputation, probably the real narrative for the UK market last year was the continuing recovery for provincial hotels.
Badly affected by the financial and economic crisis post-2008, the recovery in the provinces started in late 2012 with three years of continuous year-on-year occupancy growth to reach an anticipated record 77 per cent this year. Although the rate of growth in the provinces is slowing, it is, nevertheless, still growth.
Provincial cities that have done particu¬larly well over the past year, according to PWC’s analysis of the data, include Belfast, Bristol, Birmingham, Coventry, Liverpool, Nottingham, Plymouth and Southampton.
Cardiff, moreover, also benefited signifi¬cantly from last October’s rugby tourna¬ment with matches held at the Millennium Stadium: the key metric, revenue per available room (Revpar), surged 68.2 per cent year-on-year in the month, according to the Hotstats chain hotels marketing review. But, it noted, “demand from the corporate segment wisely avoided the Welsh capital in October, resulting in a year-on-year reduction in demand for this sector.”
But the financial recovery for provincial hotels has lagged behind. While Revpar is ahead of pre-recession levels on a monetary basis, it continues to be behind in real terms (after inflation) by about 12 per cent. But PWC believes this gap could fall to just 5 per cent below pre-recession peaks this year.
The importance of a financial as well as an occupancy recovery for provincial hotels is that it is key to encouraging future investment. But there is some good news: property agency Christie and Co says that while London retains its traditional strong attraction for hotel investment, the “significant growth” in the volume of hotel transaction deals last year was driven by the regional market as a result of increased investor confidence. This year it expects “regional [hotel] transactions to dominate the volume”.
One reason for the regional recovery – as well as London’s continuing strength – has been the rapid growth in supply of branded budget hotels in many towns and cities. About half of all hotel rooms due to open this year in the UK will be in the branded budget sector, forecasts PWC. It is not surprising, therefore, that leading budget chains Premier Inn and Travelodge are also the UK’s two biggest domestic hotel groups.
At the other end of the UK market, hotel analysts report a continuing strong demand for five-star luxury from senior business and high-end leisure travellers. Upscale country house hotels are also back in demand, particularly for top corporate meetings and events. But it is the crowded mid-market sector which appears to be most under pressure from this structural pincer-movement from below and above, creating what PWC describes as the “squeezed middle”.
INDEPENDENT HOTELIERS
Yet the real losers in this middle market are not the branded hotels but the large numbers of independent hoteliers who still comprise the bulk of the fragmented UK hospitality sector. It is these small hoteliers who are slowly but surely being replaced by the chains.
The combination of investor-owned hotels (now the standard business model for the big brands) having the finance to keep their properties fresh and up-to-date, combined with the marketing strength of the chains, makes it hard for smaller owner-operated hotels who lack the resources of the global brands to compete effectively.
Chain hotel operators can offer system-wide corporate deals across a range of brands, which appeals to many corporate travel buyers. Marriott, for example, oper¬ates nine out of its 19 global brands in the UK – the most of any leading chain.
The challenge facing travel buyers, however, remains getting best value in a market where demand remains strong, even if not at the same level as in recent years. Data from hotel booking platform HRS shows that over the past four years, from 2011 to 2015, room rates across the UK increased by 26 per cent on average. There was also significant growth across the regions over the period: rates in Leeds hotels were up 41 per cent and, in Man¬chester, by 30 per cent. “In the first quarter of the year we are expecting UK hotel prices to hold strong with a slight increase in rates as demand should remain high,” says HRS director Keith Watson.
But corporate rates will see more focus on the value of ‘extras’ – breakfast, wifi, etc – in 2016, and “buyers will need to negotiate carefully to ensure they are getting relevant inclusions at the best rates for their travellers,” says Alastair Dick¬enson, client business manager at Wings Travel Management.
UK hoteliers, however, are themselves facing a more existential challenge: the surge in the so-called ‘sharing economy’ as typified by Airbnb and others who link up private accommodation providers with travellers, both on leisure and business. There is no doubt that this represents a potential threat to the traditional UK hotel model of doing business, although issues with duty-of-care over traveller safety and security may sway many travel buyers rather than simply paying less.
And UK hoteliers are fighting back with new budget brands aimed at millennial travellers, such as Hub by Premier Inn, a scaled-down version of the regular Premier Inn offering but with added technology. Only two Hubs are open so far – both in central London – with another due to open in March on Edinburgh’s Royal Mile.
While the jury is still out over the success of the sharing economy, there is little doubt that the UK hotel world is living through interesting times.
What’s in the pipeline?
LONDON’S LATEST FIVE-STAR HOTEL – the Intercontinental O2 – will this year be joined by two other luxury properties as the demand for high-end hotels in the capital shows no sign of abating.
According to the city’s marketing agency London and Partners, another 18 five-star hotels are due to open in London by end-2018. First up later this year is likely to be the Four Seasons at 10 Trinity Square, the century-old former headquarters of the Port of London Authority, located close to the Tower of London with views over the Thames.
The hotel will feature 98 rooms and suites along with 41 private apartments, as well as all the other accoutrements expected of a luxury hotel nowadays, including a private members’ club.
Also on the London luxury agenda is a five-storey, 156-room Nobu hotel in trendy Shoreditch, the first European hotel for the group best known for its restaurants, developed by chef Nobu Matsuhisa. The hotel’s angular glass design, with concrete balconies and steel beams, will also feature a signature Nobu restaurant.
But London will continue to see more conventional four-star properties opening this year, including two Park Plazas: a 494-room hotel at Waterloo and a 168-property at Park Royal in the west of the capital.
Other UK cities can only envy London’s ability to attract high-end hotels. Much of the recent hotel pipeline in Edinburgh, for example, has been in the budget to mid-market range, but the city’s tourism and business experts believe there needs to be more luxury hotels in the pipeline.
At the budget end of the hotel spectrum, London is surging ahead with a 29 per cent growth expected in its planned properties over the next three years, including eight new Travelodges and three Premier Inns slated for the capital this year. But both Premier Inn and Travelodge also have a vigorous regional development programme. Premier has already started the year at a rapid pace with more than a dozen openings throughout the UK so far.
Rival Travelodge is adding 19 new hotels this year – including properties in Glasgow, Poole and Weston-super-Mare, to take its total to 542. It has also identified a further 250 towns and cities in the UK for further development.
And there are plenty of other operators also fuelling the low-cost sector around the country, including Easyhotel, Ibis Budget (part of Accor), and Tune. Easyhotel, for example, has new properties in the pipeline in Liverpool, Manchester and Ipswich.
Further ahead, expect more accommodation to be built at UK airports which are going from strength to strength. Work on a new £45 million, 357-bed Hampton by Hilton hotel at Stansted Airport is due to start later this year, with completion scheduled for 2017. Outline plans have also been lodged for a £700 million International Business Gateway project alongside Edinburgh Airport.
Meanwhile, the Arora group, which designs, builds and operates primarily airport hotels, has also put forward plans for a 13-storey, 298-room property adjacent to the multistorey car park at the new Heathrow Terminal 2, with a three- or four-star hotel planned. Arora is also set to build and operate two new hotels at Heathrow T4 – a Crowne Plaza and Holiday Inn Express – which are due to open in 2018.