As we look ahead to the rest of 2019, economic uncertainty around Brexit is one obvious concern for potential investors and hotel buyers. However, despite the political situation, it is fair to say that the hotel sector continues to grow in both London and the regions, with continued demand from investors.
The importance of quality
Hotels with a strong offer - be it the latest boutique design, impressive customer service or simply good value for money - are likely to continue to achieve the best performance in terms of occupancy and room rate, which in turn will assist operators in delivering a robust financial performance. These hotels are best placed to command the highest premiums and will remain in healthy demand from a wide range of buyers. Regardless of the political and economic climate, guests will still need and want to stay in the best located hotels, whether they are business travellers looking for accommodation either in the business district or in close proximity to conference venues, or leisure guests looking for a city break close to attractions and venues.
Despite the recent influx of new hotels opening in cities such as Manchester, the market has maintained a relatively stable occupancy and rate performance to date. But we feel that there is a danger that those hotels taking advantage of the stronger market without any inward investment - such as capex improvements - are risking a tail off in demand, given the significant increase in new bedroom stock coming to market and additional disrupters competing for occupancy, such as the serviced apartment sector and Airbnb.
These factors could spell increasing problems for these operators, who risk a falling market share and the downward spiral effect of falling occupancy and, in turn, rate. Hoteliers will continue to face further pressure from increasing labour, food and utility costs, all of which are likely to have a negative impact on income. In turn, this can lead to reduced numbers of quality staff, a poorer customer service offer and decreased value for money – all of which can ultimately harm the bottom line, if operators do not raise their game and invest in their product.
Ironically, there is an upside from this scenario, where we could potentially see some of these assets being sold for alternative use to speculators and developers, given the continued demand for alternative accommodation such as student housing, serviced apartments and even Airbnb opportunities.
While we continue to see the growth of the branded hotel market with many new and exciting hotels in the pipeline, demand is still strong from buyers for well-run independent hotels which can deliver an excellent return on investment compared with other sources. This trend is supported by the on-going shortage of good quality hotel stock coming to the market, an issue further impacted by continued low interest rates as older hotel owners look to recruit managers to run their hotels in order to produce a return, instead of selling up, retiring and putting the proceeds of sale in the bank.
We can see that the north of England - and Manchester in particular - remains popular with hotel investors and operators. Arguably the strongest hotel market outside of London, the north can deliver a much faster return on investment when compared with London and the South where bricks and mortar values are inherently much higher. There is no doubt that the significant investment in infrastructure such as Manchester Airport, the motorway network, amenities and the numerous attractions across the north, have also helped attract both corporate and leisure visitors to many strong locations such as Liverpool, Chester, the Lake District, Leeds and Newcastle. Whilst the hotel sector will continue to face headwinds across the country, the market in the north of England should remain steady in 2019 and continue to evolve as a leading region for the sector.
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