· RevPAR growth will continue to help drive deal activity in key European cities
· Record breaking 2015 for London – highest occupancy for 20 years
· UK regions will see the highest ever occupancy levels and record ADR rates
· Dublin will see the strongest ADR growth
· Paris is the most expensive city leading to lofty RevPAR levels in 2015
The improving economic and business travel backdrop will drive growth for the hotel sector in 2015 and 2016, according to PwC’s latest European hotel forecast*. This follows a good year for the hotel industry in 2014, as Europe attracted 20 million more international tourists than in 2013. The majority of cities included in the forecast, all bar Geneva, Zurich and Moscow, are expected to achieve higher growth in 2015 and almost all cities should see additional growth in 2016 - with the exception of Geneva and Zurich.
In 2015, the top cities by revenue per available room (RevPAR) growth, in local currency, are Dublin (8.8%), followed by Madrid (5.6%) and London (4.6%), then Rome (3.8%), Prague (3.7%), Porto (3.7%), Amsterdam (3.6%), Barcelona (3.5%) and Edinburgh (3.5%).
Hotels in Geneva and Zurich face a challenging time in 2015 with the removal of the Swiss Franc cap making tourism and hotels more costly and Moscow is impacted by international sanctions hindering its revenue growth prospects.
In 2016, in local currency, Dublin (8%) is forecasted to top the RevPAR growth league, followed by Madrid (4.8%), London (4.7%), Rome (4.4%), Milan (4.1%), Barcelona (3%), Edinburgh (2.7%), Berlin (2.6%) and Porto (2.6%).
Commenting on what’s driving growth, Liz Hall, head of hospitality and leisure research at PwC, said:
“Growth is being driven by a combination of higher average daily rates (ADR) and occupancy levels. In some countries, higher occupancies reflect a structural shift towards more branded budget hotels as well as access to online distribution channels and greater propensity to travel. In many top performing cities - like London and Paris - which operate at over 80% occupancy, this gives hotels the confidence to raise rates and it’s ADR driving the most growth.
“Many cities are benefitting from improving economic conditions in the Eurozone and a recovery in business travel. Travel is likely to benefit from the likely depreciation of the euro, arising from the ECB’s QE programme. Many visitors come from outside Europe and the improving economic situation in the US should lead to more tourists. Some cities will also receive a welcome boost from events such as the Rugby World Cup and the NFL International series (London); Milan will see EXPO 2015 and Berlin will host the UEFA Champions League final.
“Casting a shadow over growth prospects is the constantly changing balance of global growth and geopolitical risks, which will determine the global economic outlook for 2015 and this will have implications for travel and hotels in the cities analysed.”
Occupancy league table
In 2015, occupancies are forecast to be above 80% in three cities - London (84.3%), Edinburgh (81%) and Paris (80.5%). In 2016, most cities see further growth but there will be no change in the top rankings – London (84.6%), Edinburgh (81.3%) and Paris (80.9%).
Dublin will see the strongest ADR growth forecasted for 2015 and 2016 at around 7% each year. The lack of new supply in Dublin in 2015 will help incumbent hoteliers. London is also expected to see robust gains in both years, 3% and 4.4% respectively. Madrid, Edinburgh and Barcelona also see growth on top of growth.
Highest ADR (€)
In 2015 the most expensive city is Paris (€257) followed by Geneva (€232); Zurich (€193); London (€182); Rome (€143); Milan (€131) and Amsterdam (€125). In 2016 all cities, bar Geneva and Zurich, see further growth, albeit marginal for some.
Highest RevPAR (€)
In 2015 the high ADR and occupancy rates translate into lofty RevPAR levels for Paris (€206) in particular – almost €50 ahead of Geneva. But Geneva (€157), London (€153) and Zurich (€141) stay ahead of the others with Rome ranked 5th at €101, some way behind. In 2016 there is more growth in yields as Paris stays top but London jumps into second place.
Hotel investment and deals outlook
The European deals market in 2014 was very active with an estimated 30% increase in transaction volume year-on-year. The availability of debt and the improved trading conditions across Europe have resulted in increased investor demand for hotel assets and a more stable environment for banks and lenders to dispose of over-leveraged assets.
Deal activity will remain strong in 2015 with many countries expecting an increase in deal volume, although deal size may not be as strong as 2014 due to potential limited supply in further high value pan-European portfolios.
Sam Ward, UK hotels leader at PwC, said:
“The future for hotel deals across Europe is bright, as equity rich investors look to invest in the sector and benefit from stronger returns as trading conditions are set to improve. We believe that RevPAR growth will continue to drive deal activity in key European cities.”
It is also anticipated that banks and lenders will look to dispose of more over-leveraged assets in 2015 following a more stable trading and investment market. Overseas investment is expected to remain high in 2015, with increased demand from Asian capital resulting in heightened competition for trophy assets in prime European cities such as Paris, Rome, London and Barcelona, which could lead to further escalation in pricing as demand outweighs supply.
London – highest occupancy for almost 20 years
Our latest forecast for London in 2015 and 2016 is for continued growth, with 4.6% and 4.7% RevPAR growth respectively each year. This boosts RevPAR to £122 this year and £127 in 2016. In 2015, we expect growth to be driven by occupancy growth of 1.6% taking occupancy to 84%, the highest level for 20 years, and an ADR gain of 3%, to £144. Looking ahead to 2016, with occupancy already at 85%, we anticipate RevPAR growth will be driven almost completely by 4.4% ADR growth, taking ADR to £151.
UK regions - highest ever occupancy levels and record ADR rates
Our latest forecast for the UK regions for 2015 and 2016 is for more strong growth, albeit at a slower pace to 2014. Given the already high occupancy levels, PwC predicts hoteliers will be confident to raise rates upwards to drive 5.4% and 5.1% RevPAR gains in 2015 and 2016. ADR growth of 4.4% and 4.6% in each year will go some way to help rates recover and will push rates to a respectable £67 and £70 in 2015 and 2016 respectively. Occupancy is forecast to increase by almost one percentage point to 76% in 2015 and will stay there in 2016.
UK supply growth
The pace of new UK supply growth is set to pick up in 2015, with growth above the long term average. Growth is estimated at around 4.5% in London and 2% in the regions. The 10 cities with the most active (as at Dec 2014) room pipelines include London, Manchester, Edinburgh, Birmingham, Aberdeen, Glasgow, Newcastle, Liverpool, Cambridge and Bath.
Supply is running high in London; an additional 6,430 rooms (after closures are accounted for) could open in London this year, this will take London’s hotel rooms supply total to almost 136,000 rooms.
The supply pace is accelerating in the regions too and growth in new supply could reach 2% this year as a further 9,420 rooms open in 2015. These additions will take supply to around 467,700 rooms.
In conclusion, Liz Hall, head of hospitality and leisure research at PwC, said:
“The hotel sector faces plenty of challenges and geopolitical uncertainties. But we are optimistic in its ability to compete, adapt and succeed; especially now economic fundamentals of rising prosperity and increased globalisation have re-asserted themselves following the financial crisis.
“There are new trends that hoteliers need to consider and start to adapt to in 2015 and beyond. For example, the increasing potential for hotels to use robots and Artificial Intelligence to cut costs and improve the customer experience and to introduce new smartphone enabled technology (such as iBeacons). With pressure on rates continuing, we expect hotels to continue to find innovative ways to reduce costs in order to maintain their margins and customer experience.”
*Featuring 20 of Europe’s most important gateway cities, PwC’s 2015 forecast provides a breakdown of revenue and occupancy forecasts, opportunities driving tourism and investment in 2015 and the economic outlook for each city. The cities in PwC econometric forecast are all important gateway cities and/or business and tourism centres and some are on route to become mega cities. The 20 reflect the challenges facing other cities in Europe where position on the economic and hotel cycle is crucial and some cities are clearly better placed to grow than others.
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