Rising Costs Prove Challenge To UK Hotels Prompting Slowdown In Revpar Growth

Some investors could become increasingly wary of hotel assets as RevPAR plateaus amid predictions of labour shortages and increasing costs, according to Hotel Bulletin Q3 2017 published this week by HVS, AlixPartners, STR and AM:PM.

The Bulletin reports that in Q3 2017 average growth in RevPAR (rooms revenue per available room) at 5% was the lowest level since Q1 2016, although the long-term outlook for UK hotels remains firmly positive.

While these results outpace UK GDP growth, which has averaged below 1% in the same period, the impact of a lower growth environment, global political uncertainty and an increasing threat of terror is taking its toll on performance across hotels in the 12 UK cities the Bulletin polls.

Belfast and Edinburgh bucked the trend, with 11% RevPAR growth, benefiting from an increasing number of tourists taking advantage of a weaker pound. London recorded a 2% increase in RevPAR, despite a drop in occupancy, while Aberdeen recorded its eleventh consecutive quarter fall, albeit at the lower rate of 1%.

Transaction values in Q3 totalled £1.6bn, bolstered by the sale of Grosvenor House for a reported £550m, the highest single transaction since 2014. Total transaction values reached £1bn in Q3, partly attributable to investors keen to complete transactions before the impact of Brexit are felt.

While forecasts expect year-end RevPAR to show an overall increase of 4.5%, key issues for the sector are controlling costs, most notably that of labour, and the sourcing of staff due to the declining net migration and the UK’s expanding hotel supply.

However, the Bulletin points out that UK hotels rank in the top three for gross operating profit per available room (GOPPAR), reflecting a GOP margin percentage of 43.9% ahead of those in the US, China, France, Spain, and Germany, and behind only Singapore and the United Arab Emirates.

Said HVS chairman Russell Kett: “The UK hotel industry has faced a stream of headwinds in recent years, including rising costs, supply growth, terrorist attacks, and the evolution of third-party distribution and sharing economies. However, the five-year trend suggests that hotel operators will continue to adapt and innovate to drive continued growth and profitability, and thereby value.

“It is unlikely that investor interest will ever wane substantially for hotels in London, although it might start to taper off in the provinces. Performance continues to grow, albeit at a slower rate, and even though profitability may be adversely affected through rising operating costs hotels still remain very profitable, particularly when operators are talented, diligent and nimble.”