Confidence returns…

There's no denying that the main story in the hotel market last year was 11 September and how the industry has been affected by the decline in tourism since the terrorist attacks on New York.

Agents agree that while the domestic market in the provinces has been little affected by the decline in American and Japanese tourists, the global market in the capital has been hit quite hard.

Killian Morris of Davis Coffer Lyons, says that the principle issue for the hotel sector is investor confidence and when it will return to the market.

"Confidence is coming back in the medium term, but in the short term it's questionable," he says. "What is driving the lack of deals is the question of when the north Americans and the Japanese are going to fly again."

Although the market may appear limited in terms of transactions, Jeremy Jones, associate director at Christie & Co believes it is still buoyant because the funders remain in place and are still keen to back the buyers.

"From a transactional point of view, there is a shortage of stock in the marketplace and an imbalance between the number of buyers and decent hotels coming through. We are chasing the instructions to meet that demand," he says.

According to Morris there have been very few large hotel deals done because values have been slashed and those companies which are in the market are refusing to overpay.

"There is a mismatch at the moment between buyers and what price they will purchase for, and sellers and what they will accept." Gerard Nolan, director at FPDSavills agrees: " Because purchasers are far more cautious, we have seen our clients become more flexible and more amenable to taking a price reduction."

Four-star suffering
The four-star and above hotel sector in London has been hit hardest. This is because north American guests traditionally pay the highest rates in the London hotels and stay the longest.

The top end hotels have held their room rates and therefore have seen a drop in occupancy. Nolan explains that this is because hotel companies believe they are better off losing occupancy in the short term than bringing down prices.

At the opposite end of the market, the budget and "limited service" sectors have fared reasonably well since the downturn. "It's a case of upward mobility versus downward nobility," maintains Morris. "The budget and limited service sectors are buoyant because of the trend for moving from huge expense accounts towards a culture which emphasises value for money."

Trading was most difficult in the last quarter of last year because people were uncertain as to what the future held and resisted making decisions. But Nolan believes there are already signs of improvement.

"As each week goes by, there is a steady return in investor confidence. Unless there is another traumatic event, by the end of 2002 we will be on the steady road to recovery as the market gets stronger and stronger."

Although the anticipated consolidation of the market didn't happen in 2001, Jones predicts that it will occur thisyear.

"While the mid-market squeeze continues, there have been no major mergers and very few transactions because people have not been bringing their properties to the market," he explains.

He added: "I believe we will see more mid market consolidation during the next 12 months."

Licensed and Leisure Property Supplement, Spring 2002

A joint supplement by Estates Gazette and Caterer & Hotelkeeper magazine