About £4bn is being invested annually in either refurbishing or building new hotel stock in the UK, according to figures published by the British Hospitality Association.
These estimates are further evidence that the supply growth is not necessarily as benign as some are suggesting.
The BHA numbers were compiled by the editors of the annual tome Trends and Statistics 2006. The authors estimate that £3bn is currently being spent on “upgrades and extensions” and a further £1bn on new builds.
Furthermore, this £4bn is an annual expenditure. In terms of new hotels, about 150 have been added each year for the last five years, about half of them in the budget or economy segment. In total, more than 10,000 rooms are being added in the current year across the UK.
Better news – from the hotel investor’s perspective – is that the total number of hotels is falling. Data from Horizons, again from the same publication, shows that in 2003 there were 47,725 hotels but by the end of 2005 there were 47,009. This is a modest fall of just over 700.
Although no figures are given, the likelihood is that the net room count has probably remained flat as the exits are most likely to be smaller bed and breakfast type establishments taken out for alternative use while most of the new entrants are bigger properties.
More importantly for investors, the bulk of the stock leaving has little competitive impact on the chain hotels. The new additions, however, are almost entirely chain hotels.
Sales data from the three main UK sources – Deloitte, TRI Hospitality and PKF/The Bench – shows that absolute revpar figures in 2005 were all below the peak level reached in 2000.
While bears will point out that the ongoing supply increases have kept revpar growth in check, a bull might argue that the hotel industry still has much to go for. The bull case is one that sees the current new supply as justified given the positive demand growth prospects in the next few years.
Data from airline sources certainly supports the view that people want to keep travelling. Official Airline Guides, the publisher of travel data, estimates that worldwide, the volume of seats was up 4% year-on-year during October. Looking back to October 2001 shows a 19% increase.
Considering just the UK market, though, gives a little less confidence of ongoing increases in the demand to fly. BAA, the operator of seven UK airports including Heathrow, Gatwick and Stansted, said overall traffic grew 2.3% for the year to the end of September.
While these figures do include the recent security scare they are up against weakened comparatives due to the 7/7 bombings in 2005.
None of these numbers are damning evidence either way. The supply situation in particular is fraught with confusion in the absence of any coherent source either in the UK or overall in Europe.
However, looking at just London, where, thanks to the Olympics, there has been a considerable amount of research published, shows that overbuilding might be an issue.
The Hotel Demand Study, commissioned by the London Mayor and published in June this year, estimated that the capital “needs” a net 2,000 new rooms each year or 2,500 gross. The BHA figures show that some 3,000 new build rooms are scheduled to open in 2007 and 2,500 in 2008.
The appetite for hotels is currently such that the UK development environment is likely to be repeated across much of Europe. Investors should be pricing in this development risk both for any new builds and for the potential impact of excess supply on existing hotel properties.