Exceptional supply growth of a net 5% during 2008 is set to exacerbate the pain in the UK hotel industry, according to advisers Otus & Co.
Otus has calculated that almost 16,000 rooms, three-quarters of which are new build, were added to the supply of UK chain hotels. This will put pressure on both independents and small chains.
"The unknown at this stage is how many hotels will fail and have to be removed from the market during the year," said Paul Slattery, a director of Otus.
"The vigorous removal of redundant hotels will be painful for owners, operators and, not least, the banks, but without it the UK hotel business will suffer more," he added.
Otus, which describes its comprehensive database as the source of record on hotel chain supply, records nearly 200 hotel brands in the UK providing more than 3,000 hotels and nearly 300,000 rooms.
The expected absolute decline in hotel demand this year coupled with the additional room stock will cause havoc to the performance of weaker sections of the hotel business, added Otus.
Other advisers agree that there is more pain ahead. PricewaterhouseCoopers said earlier this month that the insolvencies during the winter period "may be the tip of the iceberg for UK hotels and travel".
The fourth quarter of 2008 saw 36 hotel companies enter an insolvency process, double the number of the previous quarter.
"Experience from previous economic downturns tells us that the hotel industry is hit later in the cycle than many other sectors such as retail. This is due in part to extended lead in times for hotel bookings and means that the impact tends to fall six to 12 months later than some other sectors," said Stephen Broome, hospitality and leisure director at PWC.
"The negative impact on hotel performance is likely to accelerate sharply at the start of the technical recession, suggesting these early casualties are just the beginnings," added Broome.
*More details on Otus & Co's work can be found exclusively in the next issue of Hotel Analyst which will be sent to subscribers later this month.
HA Perspective: The big issue for UK hotels remains the economy. And the past week has brought a steady stream of gloomy news.
While unemployment figures in the UK were slightly better than expected, remaining just below two million, it is only a matter of time until this figure is breached. Many forecasters expect the total to exceed three million before the cycle turns.
The Bank of England's Inflation Report issued this week was relatively gloomy for this year but relatively upbeat about 2010. The central projection was for a drop of about 3.5% in GDP, worse even than the gloomy forecast made last month by the International Monetary Fund of a 3.2% fall.
It now looks highly likely that this recession will dip lower than in the 1990s and probably worse than the 1980s. The output loss in these periods was -2.5% and -4.6% respectively.
In both these recessions, output dropped for five consecutive quarters. Following this trend, a turning point will be reached at some point during the second half of this year.
And there are reasons to hope that the turning point will come sooner rather than later. The BoE report highlighted the differences in economic stimulus at early stages of the past three UK recessions – 70s, 80, 90s – compared to now.
This contrasted the bank rate, fiscal stance, Sterling and oil prices. In all cases, with the exception of the 1970s fiscal position, there has been a significantly bigger stimulus in the current recession.
The 3.5 percentage point drop in Bank Rate this time is particularly marked as is the 22% depreciation in Sterling and the 40% drop in oil price.
It is argued that the only thing holding back the economy right now is the seized up credit markets. But even here, some economists have optimism. Morgan Stanley last week argued that what matters is not a pick-up in credit, which has historically lagged the upturn in the economy, but rather a rise in money supply is key.
They cited an IMF paper that looked at 122 recessions and 112 credit contractions. This found that a recession starts four to five quarters after a credit crunch but that recessions ended two quarters before the credit crunch that started them.
The BoE implied this week that it was set to start quantitative easing (printing money). This would deliver the expansion in money supply that the Morgan Stanley economists believe will lead the "creditless recovery".