Quarterly Forecast: Q4 2014

Will London hold strong this quarter? Zolfo Cooper’s Graeme Smith explores Q4 2014.

NOTE: This article was originally published in the Q4 2014 edition of Hotel Industry Magazine.

Choosing where to invest in hotels is a complex process of balancing expected demand against supply and understanding future local, regional, country and wider issues that may affect the success of the investment.

Our quarterly analysis provides insights into some of these factors.

What to Expect in Q4 Pipeline

Supply data shows that 3,690 rooms are due to open in the UK in Q4 2014, slightly down from 3710 last quarter.

Of these, the vast majority will be either budget or 4* as these make up 84% of the total – 58% of planned rooms are budget grade and 26% of rooms are 4*. The remaining rooms are made up of aparthotels (6%), 5* hotels (6%) and 3* hotels (4%).

Q4 Rooms by Sector

This quarter shows the continued rise in the dominance of budget and 4* hotels in the near-term pipeline. The proportion of budget hotels rises from 51% to 58% this quarter, while the proportion of 4* hotel rooms is still in second place, but has fallen over the past three quarters from 45% to 36.5% and now down to 26%.

Five star hotel openings are up slightly at 6% against 4% last quarter.

Q4 Rooms

Looking at the pipeline for specific cities, London will see the most new supply with 45% of the total city rooms, followed by Aberdeen and Manchester.

‘Other’ locations make up the next largest segment, providing 30% of capacity. This was 36% last quarter, showing that new rooms are slightly more concentrated in major cities.

Compared with last quarter, imminent London pipeline is relatively static after a fall six months ago, possibly indicating that London is becoming oversupplied or that prices have kept developers out of the city. Of the regions , London and the South lead the way accounting for 70% of all new rooms followed by the North, Scotland and Central making up the total.

Hotel-Industry-Magazine-Q4-2014

Although Scotland has consistently followed London and the South, the North takes over during the next quarter, with hotel openings across the Pennines from Liverpool to York contributing 16% of all new rooms.

London still takes the largest share by region, with 45% of the next quarter’s pipeline, followed by the South and the North. Openings in the South remain at around a quarter of all new rooms, the same as last quarter.

The proportion of new rooms planned for Q4 in Scotland has fallen significantly from 13% to 8% and may be due to previous high supply levels.

London has only one new 5* hotel opening planned for the next quarter and it’s in Old Street, not a traditional location for that type of hotel.

There is a shortage of suitable properties in London and, when they do come to market, the cost is high especially in prime locations.

For some hoteliers this means setting their sights elsewhere. In this case the choice of Old Street may be a smart move. The area is at the centre of the digital economy in London, on the borders of the City, with a vibrant atmosphere and an exciting retail, restaurant and bar scene.

For other hoteliers, the difficult investment market means switching to locations in the South with access to London.

The total number of rooms due to open this quarter is very similar to the previous quarter– 3710 in our previous report and 3690 this quarter.. In terms of number of hotels due to open, next quarter’s figures are also similar to those of the previous three months reflecting the long term nature of hotel investment decisions.

Q4-2014 Rooms by Region

Changing Visitor Numbers

Visitor numbers, both from within the UK and inbound, determine the level of demand and, to some extent, the average revenues per available room. Internal visitor levels tend to reflect GDP, as economic activity drives business travel in particular and, among consumers, the choice of holiday location.

ONS data also gives clues as to future visitor behaviour.

September’s ONS data showed that the economy expanded faster than previously thought over the second quarter.

The UK economy grew by 3.2% in Q2 2014, 0.1% higher than in the equivalent period last year. This is the best economic performance for six years.

The economy also recovered sooner than previously thought, with GDP returning to pre-crisis levels.

However, concerns over slow economic growth and a possible personal credit bubble are also growing.

UK exports have fallen slightly and the current account deficit has widened to above 5% GDP, a level widely thought to be unsustainable. Combined with the problems in the Eurozone – our largest single trading partner – an improvement in exports is unlikely in the near future.

Personal debt is also beginning to cause concern in the UK, with the Bank of England naming the high levels of household debt as a key risk to the recovery.

Consumers have increased their exposure to unsecured debt for eight successive months. One of the drivers behind this increase is the ‘feel good factor’ created by increasing house prices. However, if interest rates rise as they are expected to do in 2015, people may struggle to meet interest repayments on mortgages and other debts.

Current political and geopolitical uncertainties cast further shadows on future growth in the UK economy.
The latest ONS data for Overseas Travel and Tourism shows that visitor numbers were up 2% in July and 5% between May and July but visitors were spending 4% less per trip.

Visitors from Europe are 9% up this year, with 5% growth in business visits, 9% growth in holiday visits and visits to friends and relatives up by 9%.

The strong pound may be tempting UK residents to take more foreign holidays as ONS data showed 4% more visits abroad but 5% lower spend compared with the previous year.

This might be due to favourable exchange rates, an increase in visits to friends and family and to choosing to visit cheaper countries. It is also worth noting that the long hot summer of 2014 also had a positive impact on staycations.

Despite these clouds on the horizon, the immediate future still looks very encouraging and there will are good prospects for continued growth in demand for hotel rooms in the UK.

Budget Rules

At 58% of the total Q4 scheduled openings, the majority of new rooms are budget rated, as was the case last quarter.

However budget hotels make up only 43% of Q4 openings, indicating that budget hotels have more rooms than the average hotel.

Premier Inn continues to dominate the budget hotel sector for the next quarter, opening 1,290 or 46% of the new budget rooms (including one hub by Premier Inn hotel). The remaining budget hotels expected to open in the next quarter are Travelodge with 268 rooms, Motel One with 291 rooms, tune hotels with 236 rooms and Holiday Inn Express with 21 rooms.

Hotel Jobs

As the number of hotels continues to grow, so does the number of hotel jobs.

According to data from ONS, the number of people working in the tourism sector has grown twice as fast as in any other sector over the past four years. Jobs associated with tourist accommodation have increased by 7.1% in that period.

At the same time, employment across the UK has fallen and we now have the highest employment rate since 2008, with nearly 600,000 job vacancies unfilled.

ONS data shows that 40% of jobs in tourism are part-time, making the sector unique.

When there is a shortage of jobs it is easier to fill part-time positions, however, as employment rises it may become harder to find the right staff for UK hotels.

At the same time, the minimum wage rises every October and the Campaign for a Living Wage is gathering supporters, with the Mayor of London encouraging all local employers to pay the London Living wage.

So far only 200 have risen to the challenge, but the hotel sector, especially in London, may bear the brunt of these extra costs.

Transaction Trends

While a number of single properties have been sold, there has been a significant increase in the number of portfolio sales this quarter compared with the previous two quarters of the year.

The reasons for this surge in sales must include the high prices currently being achieved.

Owners are realising the gains in the value of their properties. The lack of suitable properties is also contributing to the high values achieved, partly by creating ‘price wars’ as buyers compete to acquire new sites.

Among the single hotel sales are two which went to Chinese investors: Beijing-based Reignwood Group bought London trophy Ten Trinity Square and will turn it into a luxury 98 room hotel with partner Four Seasons Hotels and resorts. It also bought the Wentworth Club, which has 12 rooms.

Chinese-government owned Greenland Holding Group invested £1.2 billion on two London properties including the former Ram Brewery site in Wandsworth, which includes plans for a hotel.

We can expect to see more of these as Chinese government encourages investment in gateway European cities, especially London and Paris, and Chinese investors see perceived value as well as the opportunity to acquire ‘Golden Visas’ where certain types of property acquisitions automatically confer EU residency.

For the next quarter we would expect the hotel sector to be buoyant and for transactions to continue on an even keel.

High levels of competition for London sites are likely to continue, although whether the same volumes of portfolio sales will continue in Q4 is harder to predict.

ZOLFO COOPER

T: 020 7332 5000
W: www.zolfocooper.com

NOTE: This article was originally published in the Q4 2014 edition of Hotel Industry Magazine.

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