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PwC releases 2015 hotel market forecast

12 September 2014
PwC releases 2015 hotel market forecast

Hotels in both London and the regions are expected to enjoy a strong 2015 thanks to the Rugby World Cup and a continued strengthening of the economy.

That's according to PwC, which today published its UK hotels forecast to 2015.

PwC said it saw real evidence of a sustained "growth story" in the regions after some difficult years, with the Glasgow Commonwealth Games driving the largest uplift in occupancy in the regions in July.

London

London hoteliers reported a strong start to 2014, with the capital's occupancy averaging 80%, ADR averaged £136.60 and revpar reached £87.30 - up 5.5% driven mainly by rate increases of over 3%. PwC said that overall for 2014, it expected London to see marginal 0.5% occupancy growth taking occupancy to 83%, almost 3% ADR growth to £140.52 and 3.4% revpar growth to £116.41.

Liz Hall, head of hospitality and leisure research at PwC, and author of the PwC UK hotels forecast 2015, said: "2014 saw a great start but then hit some summer trading turbulence. Hotels are confident that the remainder of the year will get back on track. The wobbles in summer trading were a combination of fewer sporting events; the impact of the euro and dollar exchange rates making London expensive; the earlier timing of Ramadan and a weaker Farnborough ‘effect'."

"The continuing economic recovery and strong travel fundamentals means that in 2015 for London, PwC forecast occupancy to pick up quite briskly with a 1.5% gain taking occupancy to 84% and a 3.6% growth in ADR will mean rates of over £145 - £5 higher than 2014. This combination will drive a 5.1% revpar advance to take yields to £122.

The regions

Liz Hall, head of hospitality and leisure research at PwC, said: "Despite the poor weather and floods at the beginning of the year there have been many positives to help lift hoteliers' fortunes, ranging from the continued economic recovery across the regions, muted new supply, sunny summer weather and some great sporting events.

"We expect further growth in 2015 from demand to attend Rugby World Cup matches. The event will be held across the country in Birmingham, Brighton, Exeter, Cardiff, Gloucester, Milton Keynes, Leicester, Leeds, Newcastle and Manchester as well as London. With a third of matches set to be played on a Sunday - traditionally a low occupancy night - the event is a great opportunity for hotels."

PwC said it expected occupancy growth to moderate slightly in 2015 with a 1.6% gain taking occupancy to 76%, with 4.3% growth in ADR meaning rates average almost £65. This combination will drive further revpar growth of 6% to take yields to almost £50 - the best result ever in nominal terms, although PwC said there was still some ground to make up in real terms.

Development pipeline

At the end of June there were around 23,000 rooms in the UK development pipeline expected to open in 2014 and 2015, more than 10,000 of these new rooms are expected in London.

Liz Hall, head of hospitality and leisure research at PwC, added: "Overall, the general feeling is that supply is not currently an issue. However, in some areas more new hotels may exacerbate any demand weakness. We would expect the development pace to accelerate more steeply as economic growth takes hold and access to financing improves."

The M&A market in the UK

PwC said that M&A activity in the UK hotel sector reflected the solid return to revpar growth, since UK hotel deal volumes have historically track market trading fundamentals. In the last two years the banks have continued to offload their hotel interests through asset and, more recently, debt transactions,
while PwC said investor confidence has returned to the UK hotel sector especially in the provinces which will likely make up nearly 60% of the total UK hotel transactions in 2014.

Looking ahead to deal activity in 2015, Sam Ward, UK hotels leader at PwC, said: "Continued strong revpar growth should drive further investor interest although deal volumes in 2015 could be constrained by a potential limit to available supply in provincial portfolio deals. PE houses will remain active and interested buyers, especially where there are opportunities to improve efficiencies by bolting on new portfolios of hotels to existing assets. Middle East and Asian investors will also be significant players in London, though in the long term this could leave the market less liquid, as they tend to hold their assets longer term."

Conclusion

David Trunkfield, hospitality and leisure leader at PwC, concluded: "The UK economic recovery is gathering pace and should bring good news for London and regional hotels as travel and consumer confidence pick up. However, the hotel sector does face ongoing geopolitical uncertainty, both in the UK and further afield, as well as other challenges.

"New products and business models could represent a challenge for existing hotels. An example is the potential impact of so called sharing economy models such as AirBnB.

"Sharing economy platforms provide new entrants and individuals the opportunity to present travellers with non-hotel alternatives in large scale under a trusted brand, and travellers are taking them up on the offer. Sharing platforms such as AirBnB are growing rapidly, and are expected to continue to do so. Some of this growth could come at the expense of hotels - hoteliers need to look at what steps can be taken to ensure the impact on the hotel industry is minimised."

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