“A year ago we commented that for the first time in three years the economic outlook looked rosier. A year on from that and it’s fair to say that we (along with most others) underestimated the level of economic growth in 2014. The bounce back of the important services sector in particular has helped confirm Britain’s encouraging economic recovery. Against that backdrop the UK hotel sector has performed strongly so far in 2014 and further growth next year appears almost certain if the forecasts of economic growth prove realistic again,” says PwC within its recent report.
The report suggests that, building on 2014 growth, the pace of the hospitality sector is expected to continue in 2015 with further robust growth in ADR and RevPAR, and with gains of 4.3% and 6%, taking ADR to over £64 and RevPAR to £49 – the highest for 15 years on both counts (in nominal terms). PwC also expect occupancies to set new highs, reaching 76% in 2015 as the Rugby World Cup (which will take place between 18 September and 31 October 2015) provides a demand fillip.
London summer trading turbulence fails to halt growth in 2014
Recap: 2013 was a bumper year and London hotels reported a great start to 2014, some enjoyed 15% revenue growth in the first 5 months. Overall, London is operating at a high level and the first half of the year saw the capital’s occupancy averaging 80%; ADR averaged £136.60 and RevPAR reached £109.65, according to data from STR Global. Overall, in the first half of 2014 RevPAR was up 3.8%, driven mainly by rate increases of over three percent.
Picking apart the individual months though reveals weakness in May and June with many hoteliers reporting that this continued into July. Luxury hotels in general were impacted more adversely than the market as a whole but as usual some bucked the trend.
“London also saw a great start to 2014 and H1 2014 RevPAR was up 3.8% over the same period in 2013,” the report says. “A bit of a trading wobble set in during May, June and July for a number of reasons, including the timing of Ramadan, and fewer events including no Champions League final. Rooms supply growth is expected to remain at around 4% overall this year, according to data from AM:PM and of the hoteliers we spoke to none cited supply as an issue in the recent slowdown. We expect the full 2014 outturn to be similar to our previous forecast in March, and will see marginal 0.5% occupancy growth taking occupancy overall to a heady 83 percent; almost 3% ADR growth to £140.52 and 3.4% RevPAR growth to £116.41.”
Provinces’ blazing pace continues into 2014
According to the report, regional hotels got off to a blazing start this year, following a strong 2013 performance. Many cities around the country have seen double digit RevPAR growth in the first five months to May including Aberdeen, Bristol, Cardiff, Coventry, Manchester York, Plymouth and Southampton. Belfast and Glasgow saw over 15% RevPAR growth.
Despite the poor weather and floods at the beginning of the year, there have been many positives to help lift hoteliers’ fortunes, ranging from the continued economic recovery across the regions; muted new supply; sunny summer weather; some great sporting occasions from Glasgow’s Commonwealth Games to the Ryder Cup at Gleneagles this year; and successful festivals such as Edinburgh.
“We expect the full 2014 outturn will show 3% occupancy growth taking occupancy overall to a heady 75 percent – the highest for 14 years; almost 4 % ADR growth to £62 – not quite back to 2007/8 even in nominal terms and 7% RevPAR growth to £46.37, which is the highest since 2001,” says PwC.
Encouraging start for UK inbound
The UK saw a record number of overseas visits in 2013 – the best result since 1961, according to the report. And although it will be a tough year to follow, Q1 2014 data show a very positive start as visits increased by 11.7% to 7.1 million. The first five months of the year saw 7% more visitors compared to the same period in 2013, whilst spend was down 1% in nominal terms. Top source markets from January to May were Europe and Rest of World, while the USA remains the most valuable market.
There is always uncertainty however. A number of geopolitical events including those in the Ukraine and the Middle East may impact aviation costs and travel trends. Russians travelling abroad are reported to be down 30″50% from 2013, according to media reports in August 2014.2 Current concerns regarding the ebola health epidemic could also disrupt travel markets.
Globally, demand for international tourism remained strong in the first four months of 2014 according to the latest UNWTO World Tourism Barometer. International tourist arrivals worldwide grew by 5%, the same rate as during the full year 2013. Prospects for the current peak tourism season are forecast to remain very positive. This growth consolidates the already strong increase registered in 2013 (+5%) and is well above the long”term trend projected by UNWTO for the period 2010″2020 (+3.8%).
Domestic holiday prospects should be enhanced by the surprisingly good summer weather and some domestic cottage and holiday parks businesses are already reporting an 11% increase in bookings; hotels will be well pleased if this is the case for them too. In contrast it will be interesting to see if the strong pound lures travellers abroad in large numbers – some trips are reported 31% cheaper. In July sterling went to a six year high against the dollar and a 22 month high against the euro. The passport office backlog may also represent a sign of overseas holiday ambitions.
How will the sharing economy disrupt hotel business models?
“While achieving any forecast is not easy and hotels clearly face many challenges, there is a new trend emerging that may not be front of mind for hoteliers currently – but probably should be soon – because it has potential to steal market share and drive down values in the traditional serviced accommodation sector,” the report asserts. “The question is whether the impact will be as significant as the growth of the budget hotel segment in the 1990’s and the emergence of OTA’s in the 2000s.”
“Our recent research shows that a sharing economy is resulting from the collision of four megatrends: breakthroughs in technology and connectivity, rising urbanisation, a growing environmental conscience and shifting social preferences. In the hospitality and leisure sector, a new breed of traveller is emerging from this coming together. Call them “Generation Y”, Millenials or Digital Natives, much has been written about a young, tech”savvy generation, who see through hotel marketing literature with a quick scan of TripAdvisor – and who, with one click, get the best deal available through price comparison websites like Trivago. Oh, and they’ll probably do all of this on their smartphone or tablet.”
Consumers are increasingly valuing access over ownership, playing out in a dynamic collection of sectors and is becoming known as the sharing or collaborative economy. Many sectors in the economy offer alternatives to ownership, but “sharing economy” sectors are different because they hold three core features:
“¢ Business models are hosted through digital platforms which connect demand and share capacity dynamically in real”time
“¢ Transactions are completed through a variety of methods that offer access over ownership (e.g. P2P sharing, subscribing, re”selling and swapping)
“¢ Consumers are more comfortable with consuming products in a way which involves deeper social interactions than traditional methods of exchange
“At the end of June there were around 23,000 rooms in the UK development pipeline expected to open within the parameters of this forecast period i.e. the rest of 2014 and 2015,” the report states. “Of this total over 10,000 new rooms are expected in London, according to AM:PM. This means 5.3% forecast annual room growth for London in 2015 compared to around 4% this year and 1.2% in 2013. In the regions the rate of growth is expected to be around 1.7% next year.
“Growth clearly varies between regions and segment with London forecast to see the highest growth in supply. Outside London, those cities with the largest active pipelines include Manchester (1,900 rooms), Edinburgh (1,370 rooms), Birmingham (1,055 rooms), Aberdeen (960 rooms), Glasgow (920 rooms), Liverpool (900 rooms).
“Are these data significant? Is supply expected to plod along slowly or are we on the cusp of another building boom? Overall, the general feeling is that supply is not currently an issue; however, evidently in some areas too many hotels may exacerbate any demand weakness. We would expect the 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.”
For full details of the report, or to download the full publication, please click here.