UK hotel recovery looks set to last
The strong recovery in the UK hotel market is likely to continue until at least 1997/8, according to hotel and leisure analysts at SBC Warburg.
Indicators in both the business and leisure sectors point to continued growth in profitability in the years ahead, say the analysts, writing in a review published by property agent Knight Frank & Rutley.
The withdrawal of sterling from the Exchange Rate Mechanism means that as economic recovery gathers pace within Continental Europe, there should be a pick-up in international demand for UK hotel accommodation.
At the same time, the buoyant short-break market in the leisure sector suggests occupancy will peak at higher levels than those enjoyed in the late 1980s.
Average achieved room rates are still lower than levels reached during the same period in the late 1980s in nominal terms, let alone allowing for inflation. Not surprisingly, Warburg sees significant growth potential.
But there is little room for further progress with bedroom occupancy. In London, this is now at peak levels, and in the provincial market, which lags behind London, occupancy is expected to peak this year.
Room rates in London increased by around 10% in the second half of 1994 year on year, and Warburg forecasts a growth at least equivalent to this during the next two years. Provincial room rates are expected to rise by 5% during 1995.
Despite performance levels reaching and exceeding those of the late 1980s, the hotel property market faces an uphill battle trying to convince investors.
Many lenders are still highly wary of the hotel sector following the recent recession and are disinclined to invest further unless there is a very good covenant, says Warburg. The result is that speculative development will be lower than in the previous peak.
In addition, expanding hotel companies are able to acquire existing stock, which means that over the next two years the values of property prices are unlikely to rise as fast as profitability. After this period, however, the low levels of development will help push up values of existing property.
Concluding on a note of optimism, Warburg says the stock market has already recognised the potential of the hotel sector with quoted companies such as Forte, Ladbroke and Stakis trading on significantly higher ratings than the market generally.
Even Queens Moat Houses, which has a negative net worth of £200m, is currently valued at more than £30m on its equity, indicating that the market believes the company's assets will appreciate markedly in the medium term.
