In comparison to 2010, trading levels for London hotels improved significantly during 2011.
TRI reported a 6.1% increase in Revenue per Available Room (RevPAR) during 2011 with occupancy down by 0.7% to 81.4%, and average room rate up 8.4% to £131.03. STR reported an 8.4% increase in RevPAR with occupancy slightly down to 82.6%, and average room rate up 7.0% to £134.
Unfortunately the costs of operation rose at a similar rate, negating any rise in net operating income for many hotels.
Five-star hotel sector to witness surge in development
In the run up to the Olympics, a large amount of additional supply is coming to the capital, bringing new names and brands to the scene. During 2011 and 2012 around 6,000 rooms are expected to open in London. London’s five-star hotel sector is undergoing a boom with a raft of new developments in the pipeline.
Luxury London hotels are back to pre-recession levels
Confidence in London’s hotels remains positive in the short term. Over 500,000 overnight visitors are expected to arrive in the capital during the Olympics. The combination of the Olympics and the Diamond Jubilee is expected to push occupancy levels during Q3 and result in over 30% growth in ADR.
PWC is forecasting a 2.8% growth in RevPAR in 2012 (+1.2% in ADR to over £135, +1.2% in occupancy to almost 84%), taking RevPAR, to its highest level since the 1970’s. STR are forecasting RevPAR growth of just 1.9% in 2012, reflecting the uncertainty in the economy.
The performance of London hotels, coupled with the weakness of the GB 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.
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.
The majority of deals in the capital in 2011 have encompassed single asset disposals. Demand is currently greatest for leased assets followed by free and clear hotels which are more liquid. Currently there is limited demand for management agreements. The cost and availability of debt is likely to remain a key factor in shaping the market going forward.
Budget hotels continue to do well
The roll out of budget rooms continues apace. London has seen a 13% increase in the number of budget rooms in the last three years and the city will have nearly 24,000 rooms by the end of this year. Budget rooms make up almost half the development pipeline in London, particularly in north and south London. New brands of note include Motel One, whose first UK site opens in Tower Hill in 2014 and Tune Hotels, with their third London hotel due to open in Paddington in 2013.
The hotel investment market is recovering
2011 saw continued recovery and strong growth in the hotel markets across the globe with a return of optimism and improved confidence. The same trend was evident in the hotel investment market with global transactions at $14.8bn in the first half of the year - an increase of 117% when compared to the same period the year before. The year saw a renewed interest in larger portfolio deals, as illustrated by the Mint portfolio, MSREF's InterContinental Hotel portfolio, and the Maybourne Hotel Group.
The total amount transacted in the UK during 2011 has shown some growth compared to 2010 - in the region of £2.4bn to October 2011, including the contested Maybourne Hotel Group transaction. There has also been a considerable increase in the number of transactions taking place, in particular in London.
The hotel investment market is predicted to see a continued increase in debt-induced sales as banks press ahead to reduce their exposure to real estate debt.
Institutional buyers will continue to focus on assets with secure, index linked income streams. Wealthy investors and specialist hotel buyers will look to acquire assets that either offer a significant discount to replacement value or have asset management potential.