In the current economic environment, many unbranded hotels are finding trading increasingly difficult.
However, a number of independently operated hotels remain successful due to strong management and the quality of the asset. Major differences are being seen across the UK depending on the dynamics of the local economy and also between various sub sectors of the market. We have seen notable growth of the mid-market Hampton by Hilton.
Top five performing hotel locations
The top five best performers in terms of RevPAR growth in 2011 were Reading, Milton Keynes, Brighton, Harrogate and Oxford. The highest occupancy was achieved at Heathrow followed by Edinburgh and York; the highest ADR was recorded at Bath. Other hot spots identified are Aberdeen, Manchester, Bristol, Plymouth, Guildford, Derby, Cardiff, Liverpool and Manchester. Cities identified with development potential are York, Manchester, Aberdeen, Edinburgh and Bristol.
The expansion of the budget hotel chains also continues apace, led by Travelodge and Premier Inn, who between them operate over 75% of all the bedrooms in this sector. A number of trading ‘hot spots’ as well as cities with development potential have been identified.
Any uplift in ADR that occurs in the short term is likely to reflect a change in customer mix, from a return, for example higher yielding corporate or conference business, rather than from any increase in prices.
TRI reported regional hotel results over 2011 with annual occupancy up 0.7% to 69.6%, average room rate up by 0.6% to £68.40, the resulting revenue per available room or RevPAR up by 1.5% on the previous year. STR reported regional hotel results over 2011 with annual occupancy up 2.2% to 71%, average room rate down by 0.7% to £58, the resulting RevPAR up by 1.5%.
There was a marked increase in distressed sales in 2011 as maturing loans with unsustainable loan to value ratios have to be re-financed. Banks are under pressure to consolidate their balance sheets and write off bad debt. This pressure is exacerbated through the slow pace of the economic recovery and fear of a return to recession.
The highly leveraged UK market has recently witnessed a significant number of distressed sales below replacement value. Hotel lending volumes are not expected to increase significantly in 2012 with the majority of the focus expected to be on London, where performance is expected to remain strong.
Quality of asset is key
In many cases the quality of assets currently coming to market in the provinces is not the highest and this, combined with the difficulties in securing debt finance, is leading to a polarisation of purchaser sentiment. The banks may be expected to remain the principal source of supply over the foreseeable future as they seek to clean their balance sheets and reduce their exposure and risk.
Potential purchasers in the provincial market over the next 12 to 18 months are likely to comprise private equity for top quality portfolios, but for the majority of regional assets will comprise regional players including developers, property companies and operators.
Any increases in value in the short to medium term are likely to be more the result of improving hotel performances than the investment dynamics that characterised the peak. 2012 should, however, be a better year outside London and there should be some Olympic uplift, albeit less than in London.
PWC are forecasting a fall in RevPAR of 1.2% in 2012 with a decrease of 2.1% in ADR to £57 and an increase of 0.9% in occupancy to 72%, its highest ever. STR forecast a more modest improvement in RevPAR of 0.6% across the regions in 2012.
Rising costs continue to impact profit levels, which are significantly impacted by high inflation. Expenses that are particularly affected are payroll, food and energy. PKF have reported that UK regional hotels outperformed their peers in London in February 2012 for the first time since 2009 with a yield improvement of 1.7, with occupancy and room rate both up.
There is a feeling that the regional market represents a buyer’s market and that now is a good time to acquire regional hotel assets, providing debt finance is available. At the same time, the fear is that trading has not yet bottomed out and there may be more value in three to four years time.