Bright prospects for UK hotel sector

The latest forecast from PriceWaterhouseCoopers has shown that the future for the hotel sector is looking bright, with the industry set to experience its best year since 2000. The accountancy firm's biannual Hospitality Research Journal revealed that both occupancy and average room rates are on the increase at a higher rate than previously predicted. As such, the inclusion of hotels would make a sensible addition to any investment portfolio.

The results this year have been strongly influenced by a dramatic upturn in the fortunes of London, which suffered heavily from the impact of the July 2005 terrorist attacks. In March 2006, PwC predicted London's revenue per available room (revPAR) growth would be 3.3 per cent, but with London occupancy rates now set to reach their highest levels for a decade, this figure has been revised to 12.9 per cent.


London is also leading the way in Europe in terms of single asset hotel transactions, with Jones Lang LaSalle Hotels reporting that sales this year have already hit £570m, well exceeding the 2005 full-year total of £526m. Rob Seabrook, executive vice president of Jones Lang LaSalle, described the level of interest in the London market as "unprecedented", and noted high value transactions such as the sales of the Great Eastern Hotel and the Marriot Park Lane, for £148m and £103m respectively.


In terms of consumer demand, the luxury sector in particular is flourishing, and has seen higher room rate growth in London than first class, mid-market and budget hotels since 2004. It is worth noting that the higher barriers for entry into the full-service hotel segment, which typically includes many luxury hotels, has meant that historically, investors value cash-flows of these hotels more highly.


Elsewhere in the UK, the mid-market sector is fighting back, with the launch of Marriott's new Courtyard brand at 20 locations across the country. Other new brands entering the UK market this year include Silken and Quest, as well as the launch of new concept hotels such as the low cost Japanese-style Yotel, and the revival of station hotels through the Sleeperz chain.


There are mixed fortunes for the UK's other major cities, with Manchester experiencing a decline in both room rates and occupancy this year despite a strong performance during 2004 and 2005. Edinburgh, on the other hand looks set to report growth significantly above the national average, as tourism flourishes and corporate demand is strong. Despite losing the Motor Show, Birmingham seems to be having a good year with a full order book for events and conferences at the NEC helping to support revPAR growth of 7 per cent for 2006.


Looking towards 2007 and 2008, further growth across the UK is expected, although on a more moderate scale. Room rate increases look set to continue and should take rates well past their previous 2000 peak, although in inflation-adjusted terms they will still be slightly behind. Meanwhile, occupancy rates will level off, and hotels will have to differentiate themselves more than ever in terms of branding and customer experience in order to capitalise on the growth of the sector.


Underlying drivers used to determine the forecast show that travellers are continuing to visit the UK in increasing numbers, particularly in the corporate sector, where 2005 saw a 10.2 per cent increase in business travel. However, the domestic market is not looking so promising, with high energy prices and low wage settlements continuing to squeeze disposable incomes. In addition, a proposed 'bed tax' to raise local government income could deter domestic travellers as the cost of accommodation rises further. On a wider scale, the industry is as susceptible as ever to 'unexpected shocks' such as terrorist attacks and the threat of avian flu, and needs to bear in mind that it could face an uncertain future.



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