• Lack of visibility limits 2011 outlook

Park Plaza Hotels said in a trading update that, despite improvements in trading in the second half, it was still "too early to comment" on whether this represented a more sustained recovery.

The company said that it was seeing "continued pressure" on occupancy and average room rate as well as low visibility, with trading conditions in 2011 likely to remain "challenging". This lack of visibility is not limited to the hotel-using public, but is a symptom of the wider global economy.

In the UK, where the group has just opened its flagship hotel, Park Plaza Westminster Bridge, GDP fell by 0.5% in the fourth quarter, after expanding by 0.7% in the third quarter, with the ONS commenting that, but for the harsh weather, it would have been flat. Within those figures, distribution, hotels and restaurants decreased by 0.5%, compared with an increase of 0.8% in the previous quarter. Hotels and restaurants contributed most to the decline in this quarter.

At the same time, the Investment Property Databank reported that UK commercial property values rose 0.3% in December, from a 0.1% growth in November, extending its 17 month run of price increases. However, growth has slowed since the summer, as wider concerns over the economy grew. The IPD has attributed capital growth to yield compression with initial yields falling 50 basis points to 6.5% by June, after which, yields shortened by 10 basis points for the final six months of the year.

The rapid rebounding of the FTSE after the announcement of the GDP figures suggested that it was inclined to view them as an aberration, although market feeling suggests that the UK's route to recovery, potted with VAT and income tax rises and government spending cuts, will be closer to ‘slow and steady wins the race' than a rapid ascent. While the snow was an unexpected hit, it did allow a preview of what could happen when all the various tax increases and spending cuts come into effect this year.

While the initial shock at the drop still held, there was talk that the now widely-forecast increase in interest rates was likely to be postponed, with rumours of a return to quantitative easing circulating. The GDP figures were, however, in contrast to inflation numbers, which have continued to rise, reaching 3.7% in December, close to double the Bank of England's target and causing two of its policy-makers to call for an increase in interest rates.

For hotels, the snow was not all bad – PKF reported that the drop in occupancy was  balanced by rate increases, with airport hotels benefiting from the closure of runways, while cities like Edinburgh, suffered due to peoples' inability to visit the city. However, closing runways is not a business plan and, as Park Plaza commented, uncertainty has lead to a reduction in visibility. Hotels, like consumers, are now operating with a much shorter horizon.

Similar to the UK, in the Eurozone, GDP growth was revised down to 0.3% quarter-on-quarter in the third quarter of 2010, from a growth rate of 1% in the second quarter, with the performance varying markedly across countries. Consensus opinion looks, as with the UK, to a muted recovery with limited risk of an increase in interest rates, dependent on inflation.

However, elsewhere greater hope was pinned on initial GDP figures for the fourth quarter coming out of the US, which saw growth of 3.2%, up from 2.6% in the previous quarter, but off forecasts of 3.5%. Consumer spending, however, was up by 4.4%, the fastest rise since the first quarter of 2006. The US, however, has been causing concern with its unemployment level, currently running at around 10%, similar to that in the Eurozone, but above the UK, which was most-recently recorded at just under 8%.

The US hotel sector is now making the transition into rate-driven growth, according to STR, with 2011 expected to see more moderate occupancy gains. The country is also set to lead what Jones Lang LaSalle Hotels' Hotel Investment Outlook report forecasts to be a 15% to 25% increase in deals volumes this year.

The Americas, led by the US, are expected to see the bulk of this, followed by EMEA. Much of this is expected to be driven by bank-forced sales, which will require trading to remain on an upwards curve to support their pricing ambitions.

Park Plaza Hotels said that it was "confident that the quality of the group's hotel portfolio and its development potential" meant that it remained well positioned to benefit from a recovery in market conditions "as and when" these occur. "As and when" continues to be a repeated phrase in the sector.


HA Perspective: Although the worst of the recession is almost certainly behind us from a GDP point of view, the next few years are likely to be when the real pain is felt.

Most of Europe, including the UK, looks set for a long, hard climb back to higher growth levels. The central case most forecasters put forward is for a below trend economic recovery. So far, only the US and Germany of the big Western economies look healthier.

The problem is that low growth is nearly as bad as no growth. And a similar prospect in store for those investment professionals dependent on the deal process to generate fees.

For existing hotel owners and equity investors the next few years are going to be a race to shore-up balance sheets before interest rate rises begin to inflict serious pain. For would-be buyers, it is a case of hoping a few of the existing owners trip-up during the race.

Given that right now it looks more like an amble out of recession, don't count on lots of fallers.

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