The UK’s mid market is continuing to be squeezed as a polarisation of supply continues. Analysis of the hotel supply pipeline suggests just 3% of new builds are destined to be for the three star market, with 50% destined for the budget market and 39% to house four and five star brands.
Currently, the three star market occupies around 30% of the UK market, say consultants Zolfo Cooper, AM:PM and HVS in their latest market analysis. But with barely any new supply, this sector is destined to shrink in real terms over the next few years. In contrast, investor attention – and new supply – is focused on the budget end of the market, and the luxury sector.
In the budget sector, the analysts include brands Hampton by Hilton and Citizen M alongside budget stalwart Premier Inn, while newcomers growing their presence include Whitbread’s Hub, Motel One and Marriott’s new Moxy, which promises to start opening UK venues within the next two years. Currently, this sector accounts for 36% of supply, making it already the largest sector in the UK market.
At the luxury end, the four star market currently accounts for 27% of the market, and precisely 27% of the pipeline. Above this, the five star market is currently just 4% of the UK portfolio, but with around 4,000 rooms set to be added in the next three years, accounts for 12% of overall pipeline.
Another sector destined for growth – and this is no surprise, given a recent Savills report on the subject – is the serviced apartment sector. Currently representing just 3% of the market, it accounts for 8% of the pipeline. Savills noted that the London market had a penetration of 0.6 units per 1,000 overseas visitors, a measure that suggested considerable potential for expansion, compared with figures of 5.8 for New York and 2.9 for Hong Kong. Outside the capital, it is probably UK rather than overseas visitors that are booking apartments, for short stays as often as long stays, in key city markets. Union Hanover, with its Urban Villa product, is keen to grow and recently received major private equity backing, a funding source that Savills says will predominate until such time as institutional investors become comfortable with serviced apartments. StayCity and Roomzzz are among local brands, while IHG is looking to grow its UK portfolio of Staybridge Suites.
Compared with the previous year, the Zolfo Cooper report says investment transactions in the first quarter were considerably down on early 2013, this year recording turnover of just a little over GBP400m. Notable deals included Starwood’s acquisition of the Four Pillars group, the disposal of eight Premier Inns and eight Travelodges, and Kew Green’s acquisition of four Holiday Inn properties. Despite the slow start, all indications are that the pipeline is stronger and 2014 transaction volumes will match those of last year.
Analysis of individual UK city markets suggests some clear winners and losers in the coming year or two for investors and operators. By collating average revpar movement over the last year, changes in supply over the last two years and the active pipeline, it is possible to detect those locations liable to oversupply, or conversely a lack of supply despite rising demand. Newcastle appears the city with the weakest market, where a strong pipeline meets weak growth in demand. Strong performers include Belfast, which saw revpar growth of 22% in the first quarter of 2014, but has little supply pipeline, and Leeds, where the only hotel due to be built soon is a five star Hilton.
Also showing strong demand growth are the Scottish cities of Aberdeen, Edinburgh and Glasgow. Record conference bookings helped Glasgow hotels to a 19% improvement in revpar in the first quarter of 2014. However, the supply pipeline in all three cities is responding, with substantial new openings planned.
HA Perspective [by Katherine Doggrell]: The good people of Guinea-Bissau favour an alcohol they fashion from cashew nuts. Cashew nuts are a staple of the country’s economic activity and are reported to make up 90% of the country’s exports. When you have limited resources, you make do with what you have. As the country’s economy follows the rest of Africa up, variety is likely to enter the alcohol market – take note booze producers.
When the hotel market was just some rooms in a house, we took what we could get. But as using hotels became more widespread, so did the options available and, blessed with choice, the consumer became more demanding. People have become used to products being tailored to them – this is not likely to change soon. People also want to have an emotional connection with brands. This is unlikely to be met in tired hotels which pre-date branding.
Earlier this year InterContinental Hotels Group and Marriott International both commented about the need for personalisation when trying to engender customer loyalty. At IHG, the company talked about the collision of the global, local and personalised experience, accelerated by the rapid rise of technology-enabled personalisation in recent years.
This was, the report said, changing the experience guests expect when they travel. Hotel brands that are able to become truly “3D” – by delivering localised and personalised experiences through trusted global brands – will build the trust that is needed to sustain lasting relationships with guests and outperform in the future.
At Marriott, a blog post by Arne Sorenson, president and CEO, had him describing a typical Millennial consumer – ‘Jia’, a 30 year-old. He said: “She’ll be skeptical about what we tell her she will like, but eager to hear from her friends about what they think she will like. That’s how Jia and her peers find their hotels and their brands. They share them. Almost 40% of US millennial travelers will not book a hotel unless they’ve read user-generated content – such as online reviews. To win her loyalty, we must be a part of that conversation. In other words, we need to act like a friend, not a supplier”.
IHG and Marriott are confident that they can do what it takes to make these connections, but both could easily have been describing the sharing economy. Driven by social connections and, with no two properties alike, there is no more personal option available. The brands which provide the distribution – the likes of Airbnb and Housetrip – are the brands with which the consumer identifies, not the brands on the properties.
Previously dismissed as for the leisure market only, they are encroaching on the corporate market. This correspondent was at a conference last week where one sponsor company has made a permanent move to HouseTrip for business travel. The mid-market may wish to convert back to its residential roots.