Viewpoint - 02/10/2012

London hotel market reviewed: Investors still attracted to capital

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In the run-up to the Olympics, a large amount of additional supply came on line in the capital, bringing new names and brands to market, with around 6,000 rooms opening in London.

Significant recent openings include The Bulgari; Me by Melia; South Place Hotel; Ampersand Hotel; Tune Hotels Kings Cross and Jumeirah Grosvenor House Apartments. New developments still in the pipeline include 10 Trinity Square; Cafe Royal; The Wellesley; Art’otel Hoxton; Intercontinental Westminster; and Chiltern St Hotel.

Olympics and Diamond Jubilee fuel summer trading

Continued strong trading in 2012 is being fuelled by international visitors and a succession of events including the Diamond Jubilee celebrations and The Olympics and Paralympics, generating strong leisure-driven business. The London economy is also less affected by the recession compared to the rest of the UK, and corporate demand has been maintained. The new supply and effect of the Olympics is expected to have an impact on London’s performance for the remainder of this year.

The effect of the Olympics was a dip in headline hotel performance levels in July (TRI): a 6.3% year-on-year increase in achieved average room rate to £159.26, set against a 10.2% decline in room occupancy, which negatively impacted on RevPAR. The decline in demand in London was not in the commercial sectors as initially predicted, but due to a drop in the proportion of demand attributed to the leisure and group tour sectors.

RevPAR jumped in RevPAR in August by 41.0% to £124.16, principally on the back of rate increase (TRI). The forecast increase in RevPAR in London for 2012 varies between the consultants: TRI are forecasting an increase of 8.9%; PWC of 2.8% and STR are forecasting just 1.5%.

There is business to be won in 2013 with London benefiting from the feel good factor created by the games. Many commentators anticipate a broadly stable RevPAR performance in 2013 compared to 2012. PWC envisages a RevPAR decline between 4.9% and 6.7% due to a drop in both occupancy and ARR as a result of reduced demand and an East London supply spike.

Investors see London’s hotels as safe haven

The performance of London hotels, coupled with the weakness of the pound, has continued to attract cash-rich overseas investors, in addition to a number of domestic companies. Furthermore, the unsettling global financial climate has worked in the capital's favour.

Some recovery in the UK hotel transaction market was apparent in 2011, mainly in the second half of the year, and this has continued in 2012, although at a modest level. Single asset transactions along with the sale of hotel development sites dominate and London remains the focus for most investors where pricing remains strong. London accounted for around 55% of the total investment value, which was £1bn for the first half of 2012 in the UK, more than double that for the same period of 2011 (Deloitte).

There is only a limited amount of stock coming to the market. The upscale and luxury end of the market continues to drive transactions, with yields for trophy assets back to pre-recession levels. Issues remain a lack of readily accessible debt financing, continuing uncertain economic conditions and the continued disparity between buyer and seller in terms of price expectation. Disposal processes are therefore likely to continue to be longer and more difficult to complete. The market is anticipated to remain flat in 2013, continuing to favour cash buyers or those not totally reliant on bank financing to close a deal. Much is likely to depend on the actions taken by the banks.

Hoteliers still seeking development opportunities

There is continuing strong demand for new hotel developments from the branded limited service operators, including Premier Inn, Accor and smaller groups including Tune and Motel One. Travelodge are planning to resume their roll out, allowing for a time lag post restructuring and CVA. The majority of their demand is expected to be in London and the South East.

There has been a surprisingly large number of budget hotels developed in London over the last three years, with a 13% increase in the number of budget rooms. By the end of 2012 the total number will be approaching 24,000. The branded full service groups such as Hilton, IHG, Marriott and Wyndham have made considerable progress in rolling out their brands, particularly through the franchise model route.


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