The UK’s hotel markets are set fair for 2014, as economic growth starts to feed through to stronger demand for rooms. But while it will be a positive year for most, there are some locations where overzealous new supply could hit rates in the short term.
The extent of the turnaround was explained in a recent market report put together by consultants AM:PM Hotels and HVS, and insolvency practitioners Zolfo Cooper. This notes that demand is improving, helping improve rates and occupancy. And increased confidence has led to a higher volume of property transactions in the sector, while the easing of bank finance is helping more new hotel projects make it off the drawing board.
“For the first time since 2007, the UK hotel market appears to be in a confident mood,” said Graeme Smith, head of hotels at Zolfo Cooper. “2013 marked the return of the UK regions both in terms of trading and transactions, reflecting more positive economic sentiment. In the absence of external shocks the outlook for 2014 is good.”
The last quarter of 2013 saw all 12 UK city markets surveyed reporting positive revpar movement, with Aberdeen and Leeds top performers, seeing a 14% increase. “Demand in Leeds reached the highest level recorded in four years in November due to a number of conferences during the month,” notes the report.
The year turned out better than the consultants had predicted, and they expect the positive tone to continue through 2014, so long as the sector can move on from the recessionary mindset. “The main challenge will be for hoteliers in the regions to have the confidence to push rate in the face of rising demand after years of having to chase occupancy.”
Bank funding has started to grow once more. The report notes several projects where HSBC and RBS are providing backing, including Hiltons in Southwark and Bournemouth, a Citizen M in London and a Tune at Canary Wharf. Other funders are entering the market, including investment funds and insurance companies.
The improvement in the sector’s fortunes means new construction is building once more, and around 14,000 rooms are expected to open this year. However, such activity is not good news for those cities where an overactive developer market threatens to deliver too much new supply down the line. The report notes Glasgow, Manchester, Liverpool and Newcastle all have an active development pipeline that measures more than 10% of its current market size; in the case of the Glasgow, the figure is as high as 15%.
For most of these cities, there is a good correlation between demand growth and supply growth. But one city that looks set to continue to struggle to raise rates is Newcastle. Hotels in the city saw revpar fall an average 5% last year, following a similar 4% drop in 2012, as demand failed to grow to meet new supply coming on stream. “The four star and apartment sector, both of which rely on the corporate market, appear particularly overstocked,” warns the report, and with an active pipeline of 11%, further pain is likely as managers compete on rate.
Also suffering from new supply, though not on the same scale, is Birmingham, which also has a strong active pipeline. Glasgow, which has seen a weak 2013, should benefit during the coming months from the city hosting the 2014 Commonwealth Games.
Curiously, the positive outlook in the UK contrasts with a somewhat different reading of the mainland European market from online travel agency Trivago. Their most recent monthly tally of actual advertised rates suggest February room rates in European cities are down 7% year on year, with some cities – including Rome, Vienna and Istanbul – showing the lowest rates since January 2011.
Said Trivago’s Denise Bartlett: “Although it is normal to see huge price differences between summer and winter, particularly during January and February, it is unusual to see a year-on-year drop in hotel prices of more than a few per cent. This suggests a general trend of decreasing hotel prices, and it will be interesting to see how hotel prices this summer compare to the summer of 2013.” What is less clear is whether hoteliers are being more responsive, and successfully using lower rates to encourage higher occupancy, in months that traditionally set the annual low water mark for demand.
HA Perspective [by Andrew Sangster]: The UK recovery has caught many by surprise. And for a change, this has been on the upside. With each new forecast, the GDP outlook seems to be improving for the UK. So in December the Office for Budgetary Responsibility forecast 2.4% for this year; the IMF repeated this number in January; and in February the Bank of England’s infamous fan charts centred on GDP growth of 3%.
Putting aside the issue of whether this is the right type of growth (we have experienced plenty of non-growth in the past five years, of whatever type), the UK is currently the best performing of the world’s major developed economies.
For this GDP growth to feed through directly into hotel company profits, supply has to be kept in check. And this looks to be the case as an extra 14,000 rooms is easily digestible provided, of course, the rooms go where the demand is growing. Some of the UK’s major cities may well suffer.