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Hotel Market Update

Published : 08/08/2024 by Callum Roxburgh

The UK hotel market has experienced a rapid recovery following the pandemic despite recent economic headwinds, as domestic and international travel rebounds. As we move into the second half of 2024, there still remains a great degree of positivity in the sector following a strong 2023 albeit trading performance has steadied, with performance levels appearing to stabilise at the new standard.

Consumer demand has remained strong across the board albeit with some regional variances, with London and Edinburgh seeing increased RevPAR figures of around 35% and 29% respectively in 2023 against 2019 despite marginally lower occupancy.

These two markets benefit from high overseas demand, particularly visitors from the US and Middle East who typically stay at higher end accommodation. The ongoing recovery of international travel is expected to support demand growth in these markets, especially over the summer. Visit Britain has forecasted that across 2024, inbound visitor numbers will increase by circa 4% year-on-year to just under 40 million visits, although elections in the US and geopolitical tensions in the Middle East could impact outbound travel from those markets into the UK later in the year. On top of the traditionally busiest summer period, Taylor Swift’s Eras Tour will see almost 1.2m fans in attendance across her 15 UK performances this summer, and the impact of ‘Swiftonomics’ shouldn’t be understated to the hotel market of the host cities.

Q1 is traditionally the weakest quarter for the hotel market and 2024 has been no exception, with occupancy in the capital sitting at 73%. This does represent an increase from 68% in 2023 however is still marginally below 2019 levels. Data for last 12 months suggests London occupancy rates in the region of 81%.

The regional market in the UK is predominantly driven by domestic tourism, and this has been somewhat slower to recover than the London/Edinburgh markets, however higher international travel costs will influence many households to travel closer to home which should be a positive outcome for domestic destinations, although consumers may be more selective in seeking value-for-money accommodation.

There has been persistent pressure on households’ disposable income levels over recent years, however with inflation dampening (which will likely lead to interest rate cuts), wage growth and a cut in National Insurance, households’ incomes should look stronger in the second half of the year.

Whilst hotels have seen increased RevPAR against pre-Covid levels, the share of this making its way through to the bottom line has been impacted by persistent cost pressures. Utilities costs, food inflation (albeit now dampening) and staffing issues have contributed to these cost pressures. Payroll costs per available room have increased by almost 20% since 2019, however this has been counteracted by the increased RevPAR across this time.

The hospitality sector has faced staff shortages since the pandemic, partially attributed to the removal of free movement for EU citizens and their right to work, which has flowed through to higher staff costs. The National Minimum Wage has just increased to £11.44 per hour, an increase of 9.8% on the previous year, with this too impacting the hoteliers operating profits. Competition for staff since the pandemic has resulted in a lot of hotel staff already being paid above the minimum wage, however an increase in the minimum wage will have a knock-on effect as higher paid staff demand similar percentage increases.

Recent data however does now show that gross operating profits of UK hotels was circa 39% in May, having now exceeded the pre-pandemic level of 38% for the same month, suggesting that improving top line figures are now outweighing the cost pressures facing hoteliers.

The trend of stronger household income is expected to continue for the second half of the year and into 2025, with consumer spending projected to improve as real incomes rise, feeding further into increased demand for hotel rooms.

Whilst demand for hotel rooms has helped push on rates in London, additional supply has dampened operators’ ability to drive rates further. Room supply across the year is expected to increase by 6%, following steady supply growth since 2021. It is anticipated just under 10,000 additional rooms will enter the market by 2026, with the majority scheduled to open within the next 6-12 months.

Strong consumer demand has flowed through to operators’ occupational demand, with select-service / budget operators willing to sign up to new leases at rates reflecting close to £15,000 per key per annum for well located hotels in Zone 2, whilst we are aware of rates of £20,000 per key per annum for budget hotels in central London.

New openings are largely being driven by projects that started pre-pandemic or as the pandemic set in, and prior to the interest rate hikes. Higher construction costs and an elevated interest rate environment have impacted new build projects, as well as development funding. Central areas of London have continued to experience supply growth, with development predominantly being driven by conversions from other uses such as offices, owing to the restraints in ground-up developments.

Although new construction is expected to slow once delayed projects are completed, London is expected to remain a sought-after destination for those trying to enter the UK hotel sector. As seen over recent months, opportunities for conversions, whether from other asset types, re-branding or re-positioning, are likely to continue driving development activity in the hotel sector, with London offering a positive long-term trend to those seeking to establish themselves in the capital.

Against the backdrop of a gloomy period of investment, investors are increasingly diversifying away from traditional commercial real estate sectors into the living sector, which includes hotels in addition to PBSA, Co-living and senior housing. UK hotel investment totalled circa £3 billion in the first half of 2024, up on 2023’s full year total of c. £2 billion although still 10% lower than H1 2019, being boosted by a number of portfolio transactions. London has seen around over half of this investment, being driven by foreign investors.

Portfolio deals in the first half of the year include Blackstone’s £850 million acquisition of the 33 regional Village Hotels, Starwood Capital Group’s £800 million purchase of 10 Radisson Edwardian Hotels in London (reflecting £390,000 per key) and Ares Management’s £400m acquisition of 21 Accor-branded Landsec hotel portfolio, as the group sought to reduce its debt commitment.

Despite the resilience of the hotel sector, as with other asset classes yields have softened over recent times, albeit to a lesser degree than many traditional assets. Leased investments occupied by select-service operators have proved popular with investors, with the underlying strength of occupational demand in addition to leases typically being at least 20 years in length appealing to a growing purchaser base. Hotels let to established budget operators continue to attract strong yields, with properties in central areas of London achieving in the range of 5.50% to 6.00%, and in some cases for the right asset and covenant sharper yields have been achieved.

This strength of investor appetite in the sector is not exclusive to the budget hotel market, as a Singaporean investor acquired the 280 key Hyatt Place London City East Hotel for circa £100m, reflecting a net initial yield of 5.1%, with the purchaser seeking to diversify their real estate portfolio.

Whilst the sector has not been without its share of issues, hoteliers and investors alike are holding a positive mindset for the coming months and years ahead.