Top-line performance in the UK hotel sector in Q2 2016 varied significantly across the country, according to the Q2 2016 Hotel Bulletin from AlixPartners, AM:PM and HVS. Birmingham and Bath were the top performers in the quarter, with 16% and 11% RevPAR growth, respectively. London, Newcastle and Aberdeen recorded RevPAR decline compared with Q2 2015.
Performance in London, as with many other major European cities, has been negatively impacted by increased global terrorist risk leading to a decline in airline and hotel bookings. London saw a 2% decline year-on-year in RevPAR as occupancy continued to decline and average room rates plateaued. Aberdeen reported a 24% decline year-on-year as the city’s hotel market continued to struggle due to its exposure to the oil and gas industry. Both Birmingham and Bath recorded growth thanks to an influx of international tourists. Similarly, Manchester reported RevPAR growth of 8%, despite supply in the city increasing by 10% in the last two years.
The research, with data provided by HotStats, found that average RevPAR over the 12 cities reviewed grew by 2%, suggesting that the UK hotel sector may be approaching the top of the market in certain locations. While new openings have slowed in the quarter, with the number of bedrooms added in the quarter being over 40% lower than bedrooms added during Q1 2016, healthy active pipeline levels suggest that many developers are not deterred by the recent plateauing RevPAR growth. Budget hotels, in particular, continue their expansion programmes, with Whitbread announcing its ambition to reach 85,000 Premier Inn bedrooms by 2020, and Travelodge confirming that it intends to have opened a total of 19 new sites by the end of 2016.
While individual site and portfolio acquisitions in the UK hotel sector picked up in Q2 2016, with £964 million of transactions completed in the quarter, this was skewed by the sale of Atlas Hotels which accounted for over half of the total acquisition value. Overall, total transaction value in H1 2016 was significantly down compared to the same period in the previous year, with investors exercising caution due to issues such as uncertainty surrounding Brexit and increased terrorism risk.
The announcement by the Bank of England on 4 August 2016, reducing forecasted 2017 GDP growth to 0.8% (from 2.3% in May 2016), indicates the seismic impact of the Brexit vote. According to Governor Mark Carney, this was ‘the largest revision’ to GDP forecast since the MPC was formed almost two decades ago. Following the revised forecast, the value of Sterling tumbled further. Weaker Sterling and a reduction in expected economic growth are likely to have implications for the UK hotel market’s future growth prospects, albeit these will not all be negative. Looking ahead, weaker Sterling will make hotel nights in the UK comparatively cheaper for overseas tourists and overseas travel more expensive for domestic tourists. It will also see hotels as an investment proposition becoming comparatively cheaper for overseas investors. For instance, in the recently completed acquisition of Travelodge Royal Scot in Kings Cross from TH Real Estate for £70 million, Hong Kong investor Magnificent Hotel Investments made a material saving due to exchange rate movements following the EU Referendum vote.
Graeme Smith, Managing Director at AlixPartners concluded: “Sterling depreciation is likely to bolster tourist trade for hoteliers in the UK, both from increasing international visitors and potentially from the return of the ‘staycation’. On the other hand, benign GDP growth may impact corporate bookings. There will undoubtedly be both winners and losers, but hoteliers may struggle to continue to drive up rates with more price sensitive leisure travellers.
“The lack of clarity around Brexit is also causing uncertainty for investors considering investment in the UK hotels sector, albeit there may be some benefit to overseas investors being able to buy cheaply in their local currency. This is likely to cause deal volumes to continue to be depressed in the near future.”