U.K. Hotels Forecast 2017: Facing the Future: a Question of Balance

• Cautious outlook for London hotel performance in 2017 as weaker demand and supply glut impact the capital

• Fall in London hotel demand in H1 2016 as corporate uncertainty and tight travel budgets take their toll

• Security concerns continue but the weaker pound will make UK more affordable to leisure tourists

• Regions have experienced a good year-to-date with overall RevPAR up 2.6% to June and we expect more growth, at a slower pace, in 2017

• 77% occupancy rates for the regions this year and in 2016 would be the highest on record

PwC’s latest UK hotels forecast shows that a combination of economic and political uncertainty along with cuts in corporate travel budgets mean that London hoteliers face a possible adjustment period where business guests could be replaced by more leisure travellers.

In terms of the UK regions, PwC’s forecast for 77% occupancy rates this year and in 2017 would be the highest on record.

The outlook for London remains cautious; with a year-on-year forecast for occupancy decline of 1.8% in 2016 and a further marginal decrease of 0.8% in 2017, taking occupancy down a percentage point to 80%. Average daily rate (ADR) growth is forecast to decline by 1.1% in 2016 but see a minimal 0.4% gain in 2017, which takes ADR to £141 and £142 respectively. This also drives revenue per available room (RevPAR) declines of 2.8% this year and a further 0.5% in 2017, taking RevPAR to £114.4 this year and £113.8 in 2017.

Source: Econometric Forecasts: PwC Benchmarking Data: STR Global, August 2016

According to forecast data from AM:PM, there will be around 625,000 rooms open across the UK by the end of 2016 with a further 18,000 rooms forecast to be added in 2017. Of this total, over 7,000 rooms are expected to open in London in 2017 – about the same as the combined 2017 pipelines for Edinburgh, Manchester, Aberdeen, Belfast, Birmingham, Cambridge, Liverpool, Leeds, Glasgow and Bath. In total a further 11,400 rooms are forecast to open in the regions.

Commenting on the latest forecast, Liz Hall, head of hospitality & leisure research at PwC, said:

“Uncertainty is dangerous and lower confidence pre and post the EU Referendum, as well as an economic slowdown, have impacted corporate budgets and travel, a vital segment for hotels. Hoteliers will need to make up for this by attracting more leisure travellers.

“But, a slow absorption of new rooms in London and some regional cities may put pressure on trading. Add to this mix, brisk growth in serviced apartments and Airbnb listings and it’s a case of weaker demand chasing more rooms.

 “However, falling Sterling may bring some short term benefits to leisure tourism to London and international destinations such as Edinburgh. It may also result in more staycations across the United Kingdom.”

Outlook for deals in the hotel sector:

Compared to the unprecedented 2015 levels of UK hotel transactions of c. £9.3 billion, there has been a significant slowdown in deal activity so far this year (a c. 70% fall year on year), mainly as a result of the continued uncertainty both in the run up to the EU referendum, and following the UK's vote to leave.

While we are expecting a pick-up in transactions completing towards the end of the year, overall we anticipate total deal volume of around £5.5bn for 2016 – just exceeding half the prior year’s record levels.

The forecast also anticipates that 2017 will likely consist single assets and smaller clusters rather than the larger portfolios of 2015. This, combined with forecast slower RevPAR growth across the UK means that overall PwC expect 2017 deal volumes to be slightly lower than this year, at around c. £5.1bn.

Commenting on the deals forecast, Samantha Ward, head of hotels at PwC, added:

“Following the EU referendum vote, it appears that a number of deals that were in progress may have potentially fallen through or been delayed due to negotiations on potential price adjustments. On the other hand, the fall in value of sterling and the low interest rate environment are both expected in the short term to boost levels of interest for inbound investment from regions such as Asia.

“We forecast some overseas inbound investment to remain in 2017, albeit we anticipate that this may be below historic levels as a result of continued uncertainty in the real estate market, with some overseas investors changing focus to other European countries.

“As a result, we anticipate hotel sector transaction levels to be relatively subdued in 2016 and 2017 in comparison to 2015 but expect a flight to good quality core hotels as risk premiums widen across the market.”

Outlook for London:

A drop-off in demand for London hotels contributed to a disappointing H1 2016, with RevPAR declines of 3.5% to June. These declines have been driven by occupancy falls each month between November 2015 and June 2016. ADR has also fallen in four of the first six months of 2016.

Whilst demand has been slowing, London’s new supply openings shows an average long term growth rate of around 2.3% since 1995. While 2012’s record peak in openings of 6.4% remains unchallenged, growth continues above average and indeed 2017’s growth rate is approaching 5%.

Liz Hall, said that, an almost 5% increase in supply in London next year could limit the potential beneficial boost from more leisure business as a result of the lower valued pound:

“Against a weaker economic backdrop and softening demand a more cautious future investment and development attitude is also likely. In the regions there could also be an imbalance in supply and demand in some cities.

“One of the key factors for growing supply has been the phenomenal growth of the budget sector in the capital which has been remarkable, and rooms available for travellers has more than doubled in the last 15 years. Around 42% of the current active pipeline in London comprises budget rooms and they make up around 20% of London’s room stock.

“The main impact on supply is on traditional 3 and 4 star hotels squeezed by a growing quality limited service sector and increasing 4.5 and 5 star hotels in the capital”

Outlook for the regions:

In contrast to London, many cities in the UK regions have experienced a good year-to-date with overall regional RevPAR up 2.6% to June, albeit the pace of growth continued to slow and occupancy levels fell in many cities. Overall, to June, the regions saw a 0.7% decline in occupancy but a 3.3% ADR gain. The regions have seen growth continue in July, according to STR Global, with RevPAR up 4.3%.

Cities faring very well included Birmingham where RevPAR was up 9.5% to June; Brighton saw a gain of 10.7%; Manchester was up 6.6%, in Wales Cardiff was up 4.3% , and in Scotland, Edinburgh enjoyed 6% growth. In contrast, Aberdeen continued to struggle with RevPAR down over 36% and Newcastle saw falls of 6.7%.

Liz Hall continued:

“Occupancy rates remain a crucial benchmark for profitability for the hotel sector. Regional occupancies have climbed back into the 70% mark since 2011 and have been creeping up since then, hitting 76% in 2015 and 77% in 2016.

“Our forecast for 77% this year and in 2017 would be the highest on record, driven partly by structural supply shifts towards a greater proportion of budget rooms.”

Sharing Economy:

The report points to more hoteliers are experiencing the impact of P2P (peer-to-peer) accommodation platforms on their bottom line and more are taking the threat from this segment seriously.

Liz Hall says that greater penetration of the P2P business travel segment and a push into the regions will drive further growth:

“Peer-to-peer accommodation is now one of the most established sharing economy sectors - we estimate that nearly £3bn of commerce was generated across these platforms in the UK alone in 2015 and this could rise to nearly £30bn by 2025.

“More disruption is expected and in London, key P2P name, Airbnb, recorded a 54% growth this year.”

The full forecast can be viewed online at: www.pwc.co.uk/hotelsforecast

* Room data provided by AM:PM

The PwC hotels forecast is based on quarterly econometric analysis of the hotel sector, using an updated PwC macroeconomic forecast released in September and historical statistics supplied by STR Global and other data providers.

PwC expects UK GDP growth to slow to around 1.6% in 2016 and 0.6% in 2017 due to the increased political and economic uncertainty following the ‘Brexit’ vote.

Overall, PwC still expects growth to remain positive on average in 2017, with the economy narrowly avoiding recession and starting to recover later next year as negotiations with the EU proceed.

Data sources: STR Global; AM:PM Hotel Database (supply), August 2016

For more information please contact: Stephen Young: stephen.m.young@uk.pwc.com 02072133645/07789808745