UK: Hotel Market Outlook - Quarter 4 2010

Last Updated: 27 April 2011
Article by Deloitte Travel, Hospitality & Leisure Group

Most Read Contributor in UK, August 2017

London Hoteliers Will See Lower revPAR Growth In 2011

Welcome to the Q4 2010 edition of Hotel Market Outlook by Deloitte – our quarterly publication for the UK hotel sector. The outlook is produced using data from an inconsistent sample of hotels collected by STR Global Limited. This data is input into an econometric model developed by the independent economic research firm, e-forecasting Inc, to produce hotel performance outlooks for London and Regional UK.

Hotel Market Outlook capitalises on Deloitte's extensive knowledge of the hospitality industry, enabling us to provide you with commentary and analysis on future trends, as predicted by the e-forecasting model, as well as historic ones.

Overview

Hoteliers in London built upon the strong double-digit revenue per available room (revPAR) growth experienced in Q3 2010 by posting further double-digit growth of 10.6% in Q4 to £112.12. It was average room rates that drove growth in Q4 – rising 10.7% to £136.39 (the highest quarterly rates for 2010) as occupancy remained stagnant at 82.2%. Hotels in Regional UK also performed well, with revPAR up 4.4% to £43.78. Growth was driven almost equally by occupancy and average room rates, each up just over 2%, ending the quarter at 65.7% and £66.65 respectively.

The Office for National Statistics (ONS) confirmed that the UK economy contracted by 0.6% in Q4 2010 as GDP estimates were revised downwards from the previously estimated fall of 0.5%. December's bad weather appeared to have a negative impact on the economy and both the ONS and The Bank of England believe that if it had not been for the bad weather, GDP would not have fallen into negative territory. Q1 2011 results will be important for the economy both for interest rate rises and Sterling. The Consumer Price Index rose in February 2011 to 4.4%, up from 4.0% in January. The main two factors to impact inflation were the rise in VAT to 20% and the continued price increase of crude oil. In March, the Bank of England kept interest rates at 0.5% – the same rate for the past two years.

The debt crisis in Europe continues to cause uncertainty and while the Euro has risen 3.9% against the dollar so far this year, as European Union leaders are still undecided about how to deal with the sovereign-debt crisis that forced Ireland and Greece to seek financial aid last year, it is thought that Eurozone interest rates rises are a "possibility" in April, according to the European Central Bank. Interest rates in the Eurozone were kept at 1% in March, however due to recent sharp rises in commodity prices; it looks like a rise is on the cards. Portugal's 10 year bond yields are at a record high (in excess of 7%), while the cost of borrowing in Italy and Spain has also risen significantly. Germany wants other European economies to sign up to a "competitiveness pact" which would limit the size of their deficits

Outlook for the London hotel market

US unemployment rate fell to 8.9% in February 2011, down from 9% the previous month. This was the third month in a row that the jobless rate fell and February's figure marked a two-year low. President Barack Obama said the figures showed progress in the US economy and most jobs were gained in construction, business services and transport sectors. Q4 2010 GDP in the US rose by 2.8% according to the US Bureau of Economic Analysis, the sixth consecutive quarter of expansion.

Despite the individual economic issues the UK, Europe and the US, one of the stories to hit the headlines recently has been the current crisis in the Middle East. As tensions have escalated, the price of Brent crude oil has been on the rise and at the beginning of March hit a two-and-a-half year high of $119 a barrel. Libya's usual output of 1.6 billion barrels-per-day has currently been reduced to less than 750,000 barrels by the conflict. The conflict has a serious impact on the global travel and tourism industry and in light of this; the International Air Transport Association (IATA) recently cut its airline profits forecast to $8.6 billion in 2011, down from $16 billion in 2010. IATA had previously forecast earnings of $9.1 billion. Rising oil prices will be the biggest threat to airlines this year, and if the protests spread to other oil-producing countries, prices may jump even further.

In terms of transaction activity, London saw more than £1.5 billion in deals during 2010, with the overwhelming majority being single asset deals. Prime properties in the capital remained in high demand, a reflection of the 11.3% increase in revPAR. In Regional UK, there were a small number of deals, but no significant transaction activity.

London

The 10.6% revPAR growth in the capital during Q4 was spot on in terms of what the model had predicted in the previous edition of Hotel Market Outlook. Although the 0.9% rise in occupancy did not come to fruition and remained stable at 82.2% for the quarter, average room rates rose slightly more than expected at 10.7% to £136.39. The year-end results also matched predictions with London hoteliers seeing revPAR up 11.3% to £106.71. Average room rates were the key driver in the capital during 2010, with £10 being added compared to 2009 to end the year at £126.11.

The outlook for the capital is more challenging however. With UK GDP expected to rise just 1.3% this year and the increase in VAT to 20%, retailers are expecting a more challenging operating environment. On the positive side however, the Royal wedding in April will no doubt bring more overseas travellers to London, although the overall mix for the month is affected by displaced corporate demand. With this in mind, the model is predicting revPAR growth of 3.1% for 2011 to £106.71. This is an upward revision on the 2.2% previously forecast by the model in the last edition of Hotel Market Outlook. Although occupancy is expected to fall slightly to 80.9%, average room rates are predicted to rise just short of 5% to £131.86. The first half of this year is expected to see the strongest growth in London, with Q2 forecast to post double-digit revPAR growth in excess of 12%.

Looking further ahead to 2012, with the London 2012 Olympic and Paralympic Games on the horizon, the model predicts revPAR to rise 4.2% in London. Occupancy is expected to reach 82.0% for the year, while an additional £4 is thought to be added to average room rates compared to this year, ending the year at £135.70.

Outlook for the Regional UK hotel market

Regional UK

Hoteliers in Regional UK on the other hand did not post the 8.2% revPAR growth in Q4 as forecast by the model in the earlier edition of Hotel Market Outlook. Although this growth was not achieved, revPAR rose a robust 4.4% to £43.78 for the quarter. Both occupancy and average room rates rose more than 2%. As a result, year-end 2010 saw hoteliers in Regional UK end on a high-note, with revPAR up 4.1% to £44.49.

The outlook for the regions is more muted than the capital for 2011, with revPAR expected to rise 2.4% by year-end. While occupancy is expected to remain stagnant throughout the year, it is average room rates that are thought to drive growth, rising 2.3% to £67.02.

Looking further ahead to 2012, the outlook is expected to remain relatively steady, rising 4.0%. Occupancy in 2012 however is forecast to rise 2.3% to just short of 70% – no doubt a knock on impact of the London Games events being held around the country. Average room rates are not expected to see much pick up though, rising just 1.7% to £68.13.

Authors comment

We remain more optimistic on London than the model predicts. The year looks set to reflect some weakness in demand with ADR increases more than enough to offset this as hoteliers raise both corporate and leisure rates.

The outlook for the regions looks fair although here if anything the risk is more on the downside dependent on the strength of the recovery and the resilience of the UK consumer.

To keep you up-to-date, Hotel Market Outlook will be available each quarter with the latest monthly indicators that shape the future of the industry.

Future prospects

Hoteliers across the country will have been pleased with the results they achieved during Q4 2010 and in turn the year-end results. After the difficult few years the UK has faced, struggling out of the economic downturn, double-digit growth of 11.3% for the capital is good news. The current forecast for 2012 however is not as strong as hoteliers might expect given the Olympic Games being held in the capital next summer. Hotel demand in an Olympic year is very complex. The peak is clear but the breadth and depth of the "shoulder" periods and the affect of demand in other "normal" channels is difficult to predict.

In the transaction market, 2011 activity is expected to see growth of "potentially" 20-25% in deals across Europe. Portfolio deals are likely to see a resurgence as debt funding improves and lending metrics become more attractive. There appears no shortage of equity amongst the familiar hotel/property investors in Europe as evidenced by a number of all-equity deals in 2010. An improvement in the availability of debt will allow the buyer community to widen. The outlook across many European markets is brighter than 12 months ago which is likely to lead to a more favourable conditions for those considering asset disposals. In many cases it's a hold for slow improvement or exit on the back of the performance rebound that has occurred in many key markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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