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Perfect storm ahead predicted for UK hotel sector

11 December 2019 by
Perfect storm ahead predicted for UK hotel sector

A slowdown in revenue per available room (revpar) and rising costs is expected to drive the UK hotel sector into a perfect storm.

That is the stark warning in the newly published report Hotel Distress on the Horizon? from turnaround and restructuring specialist AlixPartners. After seven years of solid performance, UK hotels are said to be finding it increasingly challenging to deliver profit growth.

As a result, AlixPartners believed that “the signs point to the UK hotel market reaching a cyclical valuation high and that an increasing amount of restructuring is on the horizon”.

The current state of the market followed a period of exceptional revpar growth which kicked off around the London 2012 Olympics, with a peak being reached in 2015 when London and the regions reported 10% and 17% increases respectively. Growth then steadied, with another more modest increase of around 6% in both the capital and beyond in 2017, driven by a weakened pound following the 2016 EU referendum.

The buoyant times resulted in a significant number of new hotel bedrooms: nearly 100,000 have opened since 2012, an increase of 18% compared to the number seven years ago. London has accounted for more than 35,000 of the new rooms.

While the increase in rooms has been absorbed by a market increasingly focused on quality, there were now signs of a decline in performance after the regions reported a decline in revpar growth for the first time since 2012 at the beginning of the year.

“This is particularly worrying,” said the report, “given strong active pipeline levels, which represent 10% of current supply in London and 6% in the regions”.

Hoteliers are also facing increasing overheads from a rise in salaries, food and beverage costs, utility and business rate bills, alongside crippling fees of up to 30% charged by online travel agents.

In these uncertain times, the report advised operators, investors and lenders to choose a capital structure that is resilient to a dip in trading; maintain a focus on day-to-day operations by keeping close tabs on what the competition is doing, reacting to changing customer needs, and closely managing staff efficiency and departmental profitability; and preserve the value of the business by planning for a downside scenario.

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