Over 10,000 new rooms are expected to open in London over the next two years, with the focus on the budget sector.
According to the latest forecasts from PwC, future was growth was likely to be affected by the rise of sharing platforms such as Airbnb.
The company said that at the end of June there were around 23,000 rooms in the development pipeline in UK due to open over the next two years, with 10,000 of these in London alone.
The new room supply, which includes hostels and serviced apartments in addition to standard hotel rooms, is off the 2012 peak, which saw 18,665 rooms open in one year, 10,689 of them outside London.
While budget hotels comprise almost 23% of current supply they make up a 50% of the total pipeline, including in London (for 2014 and 2015). In contrast, the mid-market sector encompasses 42% of current supply but only 3% of the UK pipeline. The four and five star segment account for almost 40% of the active pipeline and four star rooms are expected to grow by over 3,600 rooms over the next three years.
David Trunkfield, hospitality and leisure leader at PwC, said: “The UK economic recovery is gathering pace and should bring good news for London and regional hotels as travel and consumer confidence pick up. However, the hotel sector does face ongoing geopolitical uncertainty, both in the UK and further afield, as well as other challenges.
“New products and business models could represent a challenge for existing hotels. An example is the potential impact of so called sharing economy models such as Airbnb.
“Sharing economy platforms provide new entrants and individuals the opportunity to present travellers with non-hotel alternatives in large scale under a trusted brand, and travellers are taking them up on the offer. Sharing platforms such as AirBnB are growing rapidly, and are expected to continue to do so. Some of this growth could come at the expense of hotels – hoteliers need to look at what steps can be taken to ensure the impact on the hotel industry is minimised.”
In the serviced apartment sector, over 1,300 rooms opened in 2013 and to date in 2014 and a further 1,740 rooms “could”, PwC said, open in the apartment sector in 2014/2015 under brands such as Adagio, Urban Villa, Roomzzz, Bridgestreet, Go Native, StayCity, Cheval, Marlin and Staybridge Suites.
Liz Hall, head of hospitality and leisure research, PwC, said: “Overall, the general feeling is that supply is not currently an issue. However, in some areas more new hotels may exacerbate any demand weakness. We would expect the development pace to accelerate more steeply as economic growth takes hold and access to financing improves.
“In counterbalance, there have been warnings that in the UK’s big cities hotels face competition for land from residential and office developers. This may impact the development pace as it gets harder and more expensive to acquire sites.”
The company forecast that hotels were set to benefit from the expected economic growth. The first half of this year saw the capital’s occupancy averaging 80%, ADR average GBP136.60 and revpar reached GBP87.30 – up 5.5% driven mainly by rate increases of over 3%.
Overall for 2014, PwC expects London to see marginal 0.5% occupancy growth taking occupancy to 83%, almost 3% ADR growth to GBP140.52 and 3.4% revpar growth to GBP116.41.
Hall said: “The continuing economic recovery and strong travel fundamentals means that in 2015 for London, PwC forecast occupancy to pick up quite briskly with a 1.5% gain taking occupancy to 84% and a 3.6% growth in ADR will mean rates of over GBP145 – GBP5 higher than 2014. This combination will drive a 5.1% revpar advance to take yields to GBP122.”
Outside London, PwC expects 3% occupancy growth to take occupancy to 75% – the highest for 14 years, almost 4% ADR growth to GBP62 and 7% revpar growth to GBP46.37. For 2015, the group forecasts occupancy growth to moderate, with a 1.6% gain taking occupancy to 76%. It anticipates 4.3% growth in ADR to almost GBP65, driving revpar growth of 6% to take yields to almost GBP50.
Looking at likely M&A activity in the sector, the company predicted that deals would be up 40% on the year. Looking to 2015, the company said it believed strong revpar growth would continue to drive deal volumes, “though these may be slightly lower in the Provinces than 2014 with the slight decline in forecast revpar growth and the potential lack of equivalent supply of portfolio deals”.
It added: “We believe the private equity houses will remain active and interested buyers, especially where there are opportunities to make potential cost savings through the integration of hotel portfolios with existing management platforms. Middle East and Asian investors will also be significant players in London, though in the long term this could leave the market less liquid, as they tend to hold their assets longer term.”
The forecasts came as Accor announced what will be London’s biggest budget hotel, in the Trocadero complex. The site has been the subject of a number of proposed developments over the years, but the 583-room Ibis Styles Piccadilly Circus looks to be the winning choice, with plans to open in 2017.
Accor will also open MGallery Leicester Square hotel in the Victory House heritage site towards the end of 2016, which will have 80 rooms. The future has indeed been budgeted for.
HA Perspective [by Chris Bown]: London continues to draw in visitors, with the result that hotel rates and occupancy levels remain high. As one agent noted wistfully a while back, the UK capital seems to have a canny knack of absorbing extra hotel capacity. Visitor numbers are at a high, with the capital’s airports reporting record breaking numbers recently.
And pipeline figures do not always translate into new supply. Annie Hampson, director of planning at the Corporation of London, speaking at a conference recently, noted: “There are quite a lot of committed scheme that remain to be built out.” One example is a City development to create a Four Seasons, which received planning approval in 2011. Singaporean operator UOL has just bought the site and will create a Pan Pacific instead. But with construction yet to start, an opening is unlikely before 2018.
The pipeline will also be tightening. Planning authorities have signalled a firmer approach to the loss of office space to alternative hotel and residential uses. Much has already been lost to conversions, but with the UK economy improving they are keen to ensure businesses have room to locate and grow in the capital. The housing market, too, has meant developments are often worth more as flats, than as hotel rooms.