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Market snapshot: Hotels

24 April 2006

The hotel market

There are some 162,879 hotel rooms available each day in the UK at an average room rate of £78, according to consultancy Deloitte.

Although there are no exact figures, the British Hospitality Association (BHA) says there are 22,000 hotel and guesthouses registered with their local tourist boards in the UK at an average size of 20 rooms and with a total turnover of around £27b. The number of hotels rises to about 60,000 if you add in properties that are unregistered.

With the average hotel room now "earning" around £21,870 a year (just £1,500 less than the average UK salary of £23,400), according to consultancy PKF, it is possible to put a value to the industry of around £3.56b

London remains the heart of the industry, although since 2001 and last year's terrorist bombings it has proved vulnerable to sudden shocks. Outside London, in terms of recent performance, Aberdeen has been doing particularly well, fuelled by its oil trade, as have Edinburgh, Glasgow and Brighton, on the back of buoyant conference activity.

According to Deloitte's HotelBenchmark research, occupancy levels around the country currently average around 64.9%, (although PKF puts it at more like 73.3%) with revenue per available room (revPAR) running at about £50.

Key players
Whitbread, owner of Premier Travel Inn, the UK's biggest hotel brand, is the indisputable daddy of the hotel sector, with some 460 hotels and 29,000 rooms.

Permira's Travelodge budget chain and InterContinental Hotels Group (IHG) (InterContinental, Crowne Plaza, Holiday Inn, and Express by Holiday Inn) follow, with 270 and 227 hotels respectively, according to the BHA's 2005 Trends and Statistics survey.

Other key players include Swallow Hotels and Inns, with 110 properties, and Mitchells & Butlers on 104.

Growth prospects

PKF estimates that, in 2005, the sector experienced growth of 2.9%, primarily driven by a higher average achieved room rate, which rose 3.7% to £81.71, against a slight decline in occupancy, which fell 0.8 percentage points over the year.

Hotel rooms are now achieving the highest level of return since 2001, with an average daily yield of £59.92 in 2005, it calculates. Deloitte calculates that the year to February 2006 saw revPAR grow by 5% (3.1% in the regions) and occupancy rise 1% (but fall 0.4% in the regions).

What is intriguing about the sector's continuing growth is that it is bucking the trend on the high street, where retailers are seeing a continuing tightening of purses, says Marvin Rust, partner for HotelBenchmark at Deloitte.

Despite a dip after last year's London's bombings, there is as yet little sign, over the longer term, of the rebound experienced by the industry since 2003 beginning to dip.

"The indicators are pretty positive," adds Robert Barnard, head of hotel consultancy services at PKF. "The bombings took the shine off London's performance but overall the economy has trundled on and the regional markets are now doing better too."

London's continuing growth (with revPAR up 8.3% in the year to February 2006 according to Deloitte) can be put down to two factors: continuing strength in international visitors and the robust recovery following 7/7, argues Rust.

"Hotels have been quite strong with their corporate renegotiations and have remained pretty confident in their pricing. The main effect after 7/7 was pure occupancy, which dropped something like 20%, but hotels held their prices which has been good in terms of the strategy coming back," he explains.

Growth rates are expected to be maintained during the year in London, unforeseen shocks apart, but the slowing of the domestic economy could start to have a knock-on effect on regional hotels, predicts Rust.

While there is still some room for growth in terms of occupancy levels, most of the focus is on improving yield and leveraging prices, Barnard suggests.

Key trends

Private equity and venture capitalist firms are continuing to build a significant presence in the market. "The problem with this is that my crystal ball runs out in a couple of years' time," says Barnard.

Equity houses and venture capitalists, by the nature of their business, rarely invest for the long-term, looking for a return and an exit strategy somewhere down the line.

"Hotels that have been sold to private equity funds may be facing them exiting at some stage, what happens after that is a very, very big question," he ponders.

Already there are some signs of this happening. Travelodge's private equity owner Permira has admitted it has called in advisers to help decide the future of the budget hotel brand, with options believed to include refinancing, a £1b sale, flotation, or a venture capital-backed management buyout.

A recent study by Jones Lang LaSalle Hotels also found that equity firms have slashed the length of time they invest in hotel properties by up to half, from between three to seven years to between two to four years.

But others are more optimistic. Joni Smith, associate director of property consultancy CB Richard Ellis Hotels, recently predicted that buoyant investment in the hotel market was likely to continue because returns remained higher than those from commercial investments.

And Deloitte's Rust adds: "We were involved in 22 of the 28 deals last year, and we are very busy at the moment, there is no downturn in transactions. Private equity firms still have a lot of capital at their disposal and there is still an appetite to look at the hotel sector."

When it comes to property, agent Christie + Co has predicted double-digit percentage increases in property values for 2006 following a strong performance last year.

There has been a lot of sale-and-leaseback activity within the market during the past 12 months, concedes Dan Griffiths, director at property agent Christie + Co.

But there is also a continuing pressure on sites, he argues. While there will always be demand for period properties with character, newer structures that can be easily developed to reflect an operator's brand are also starting to attract a premium, he says.

The popularity of the sector with the City has meant investors have begun to move away from simply financing deals to getting more closely involved, perhaps through management contracts or even operating properties themselves.

"It is very much a growing market at the moment. The key is the continuing availability of funds. Investors are buying into the growth story and looking to add value to how the businesses operate," adds Griffiths.

Future direction

The trend towards more management contracts will continue, and there is unlikely to be a let up on the pressure for sites, predicts Griffiths. "The market is looking settled, as long as there as no new shocks," he says.

As such the focus will be on how to get the most out of existing brands and assets rather than rushing for new properties or locations, he believes.

There may also be more interest in mixed-use sites and locations where hotels might not traditionally have been expected. "Hotels might become more bolt-on rather than stand-alone," he says.

Growth will be steady so long as the economy holds up and nothing comes along to stop the sector in its tracks, says Deloitte's Rust. The majority of what growth there is will be in the budget and luxury sector, he predicts, with City centre mid-range hotels being particularly pressed.

There will also be continuing demand for hotels that have a unique selling point or can offer something "extra", such as golfing, health clubs or spas, he argues.

Year to date performance (01/2006-02/006)

OCCUPANCY
2006 2005 % change
All UK hotels64.9%64.3%+1.0%
Regional61.9%62.2%-0.4%
England (excl London)62.3%63.1%-1.3%
Scotland60.4% 57.4% +5.3%
Wales58.5%60.1%-2.7%
London73.1%69.9%+4.6%
AVERAGE ROOM RATE20062005 % changeAll UK hotels£78£75+4.0%Regional£65£63+3.5%England (excl London)£66£64+3.4%Scotland£63£60+6.1%Wales£67£68-1.3%London£106£102+3.5%
REVPAR20062005% changeAll UK hotels£50£48+5.0%Regional£41£39 +3.1%England (excl London)£41£40+2.0%Scotland£38£34+11.7%Wales£39£41-4.0%London£77£71+8.3%

Daily available rooms

20062005All UK hotels162,879159,319Regional117,358114,269England (excl London) 96,49593,648Scotland16,82516,814Wales4,0383,808London43,74543,277Source: Deloitte HotelBenchmark Survey British Hospitality Association](http://www.bha.org.uk/) [CB Richard Ellis Hotels](http://www.cbrehotels.com/) [Christie + Co](www.christie.com) [Deloitte](http://www.hotelbenchmark.com/) [Jones Lang LaSalle Hotels](www.joneslanglasallehotels.com/) [PKF
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