Analysis: Aberdeen's hotel market feels the pressure of the oil price drop

12 February 2016 by
Analysis: Aberdeen's hotel market feels the pressure of the oil price drop

A fall in global oil prices has led to tough times in Aberdeen, and the once-buoyant hotel market there is bearing the brunt. Katey Pigden investigates

The Granite City may have remained unscathed during the global financial crisis of 2008, but it's certainly in a hard place now. While the rest of the country suffered during the recession, Aberdeen was on a high as oil prices reached more than $100 a barrel.

Several sectors in Aberdeen are struggling as a result of the crisis and hotels are no exception. The city has gone from best-in-class performer to worst-in-class performer in the most recent instalments of the Hotel Bulletin reports drawn up by AM:PM, HVS and AlixPartners.

Aberdeen's hotel market is dominated by demand from the oil and gas sector, although leisure development has started to pick up in recent years. The city was the top performer for around 18-24 months due to sustained, strong energy demand.

Low growth

Investors reacted to this by developing and acquiring hotels; a decision many may regret. Growth figures for Aberdeen have now dropped to the lowest level of the 12 major cities reviewed in the Hotel Bulletin. This followed the collapse in oil prices, which resulted in companies reducing operations in the area.

The pipeline of hotel rooms for Aberdeen remains high, but a large amount of this is due to investment decisions made in the good times. Ongoing planning applications suggest investors are confident in a longer-term recovery in oil and gas-driven demand.

A total of 194 bedrooms came into the market in Aberdeen in 2014, including the 148-bedroom Village Urban Resort. This followed 303 bedrooms the year before. In the last two years, the number of hotel rooms in Aberdeen has increased by 12%.

Dominvs Hospitality opened the 165-bedroom Crowne Plaza Aberdeen Airport last month next to its 193-bedroom Holiday Inn Express, which opened in May. More than 500 bedrooms have opened in Aberdeen in the past 12 months.

Plans to further develop Aberdeen's conference offering with the £333m new Aberdeen Exhibition and Conference Centre were approved in March 2015.

The 750,000 sq ft complex will include a 10,000-seat arena, three hotels and an anaerobic digestion green energy centre.

Subject to planning, work is expected to start in mid-2016 with completion in late 2018, in time for that year's oil and gas conference, Offshore Europe.

Scott Harper, chief operating officer of Malmaison, which operates a 79-bedroom hotel in the city, told The Caterer: "Trading conditions in Aberdeen are difficult currently, not just for hotels but for most businesses.

"It goes in cycles in the city because of the oil prices, although it does seem particularly difficult this time round.

"Year-on-year figures are down for our Aberdeen hotel, but I believe we are doing better than the market generally and we are fortunate enough to have a good geographical spread with the brand."

Harper explained that while the hotel is struggling to fill rooms, the food and beverage side of the business has held up well.

He said: "Locals appear to be resilient to downturns in the market. Our restaurant has continued to attract people and is a big favourite in the local market."

Graeme Smith, management director and head of hospitality at AlixPartners, which has been monitoring progress in the city, said: "Since the onset of the oil price decline in spring 2014, a number of companies within the oil and gas sector have been taking steps to protect their position and preserve profitability.

"During this time, the hotel market in Aberdeen experienced a change in fortune."

Future revival

In April 2014, Aberdeen recorded its 17th consecutive month of double-digit revpar growth. But since then has seen average monthly declines of 6%. This downward trend has continued through to October this year.

Smith added: "The speed and timing of this switch highlights the city's significant exposure to the oil and gas sector."

He explained that during the pre-2014 hotel performance surge in Aberdeen, hotel developers believed the city was under-supplied and began investing heavily. He concluded: "Hotel investors appear confident of longer-term revival in Aberdeen. It will be interesting to see how many of these projects come to fruition."

But Aberdeen is in a good position to benefit when the oil industry recovers, and the newest hotels could reap the greatest rewards, according to hotel consultant Melvin Gold.

He said: "It won't feel good in Aberdeen at the moment because of the extra supply, but logically the oil market will pick back up and so will hotels in the city.

"Aberdeen will be well-placed for the upturn in both oil prices and activity in the future, and is likely to be at the forefront of new types of energy.

"New hotels in the market can have an effect on hotels that haven't invested in the good times, and this is a problem for the whole sector. Some hotels will be able to deal with downturns as well as upturns."

Timeline: Rocky times for the Granite City

Q4 2013

Back in Q4 2013, Aberdeen was described as a notable winner for the period with a revpar increase of 14%. It demonstrated strong, sustained and far-reaching growth in 2013 with supply growth following demand growth. Aberdeen and Edinburgh's performances outstripped the other 10 cities included in the report: London, Glasgow, Liverpool, Newcastle, Birmingham, Leeds, Cardiff, Manchester, Bath and Belfast.

Q1 2014

Aberdeen was still one of the cities that recorded the highest revpar growth, but it failed to take the top spot for the first time since December 2012. Belfast topped the list with revpar growth of 22%, followed by Glasgow with 19% and Aberdeen with 12%. But occupancy decreased for Aberdeen by 4% as new supply and active pipeline levels continued to creep up.

Q2 2014

Revpar was shown to have returned to pre-2008 downturn levels for eight of the 12 cities reviewed. Aberdeen, Bath, Edinburgh and London generated revpar far in excess of 2008 levels, which demonstrated the growing strength of the markets. The report said the UK hotel market was displaying characteristics of a cyclical upturn, with demand consistently growing strongly in spite of additional supply. The active pipeline as a percentage of current supply for Aberdeen increased from 9% to 17% in a year.

Q3 2014

Aberdeen's 3% revpar increase was the lowest of all the cities reviewed. It was highlighted for having a supply risk with an active pipeline of 16% of current supply, while occupancy decreased by 7%.

Q4 2014

For the second consecutive quarter, Aberdeen found itself towards the bottom of the 12 cities reviewed. The report said that since June 2014 the price of oil had decreased by approximately 50%. It stated: "Severe price volatility is likely to cause uncertainty among both corporate clients and hotel investors. Developers and operators alike will be watching closely to see how activity levels in the North Sea change in response to this price fall."

Q1 2015

By Q1 2015, Aberdeen was clearly struggling, so much so that it formed the Hotel Bulletin's main focus for the period. The city recorded a decline in revpar of 10% against Q1 2014. Since Q2 2013, the number of bedrooms had increased by 14% in response to the unrivalled demand for growth. An imbalance between demand and supply was highlighted as an issue for Aberdeen. The city had consistently recorded strong performance over the past four years, peaking at 25% revpar growth in Q3 2013. Occupancy rates dropped over the last six consecutive quarters and performance became stagnated. Hoteliers had previously been able to increase rates to compensate for the fall, yet in Q1 2015, for the first quarter in four years, quarterly revpar decreased in comparison to the previous year. The UK North Sea oil and gas industry made a loss of £5.3b in 2014, the worst outcome since the 1970s.

Q2 2015

Aberdeen's woes continued as the city was the only regional city to record a revpar decline. Oil companies reacted to the drop in oil price by scaling back investment plans. Hoteliers' attempts to bolster occupancy by cutting rates were unsuccessful, with occupancy dropping by 13%.

Q3 2015

Aberdeen was the worst performer for the third consecutive quarter with a 22% decline in revpar. But new hotel investment plans in the city indicates investor confidence in the longer-term outlook. Active pipeline remains at 8% of current supply and more than 200 rooms were added to Aberdeen's development pipeline in H1 2015.

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