UK hotels forecast 2018 As good as it gets?

PwC UK hotels forecast 2018

Here you will find our forecast for the UK hotel industry for 2018, and what we think will be the key drivers and trends, impacting hoteliers in the coming year. Join the conversation on twitter: #hotelsforecast

Key findings

The good fortune of the hotel sector continues but as uncertainty weighs in, is this as good as it gets? UK hotels have enjoyed record trading, underpinned by the boom in overseas leisure travel. PwC forecasts a slower pace of growth in 2018 as the stimulus of the weak pound starts to weaken, and new supply kicks in. Add into the mix, global political volatility, an expected deceleration in UK economic growth and continued Brexit policy uncertainty, and we look to a cautious, but still reasonably strong growth forecast in 2018.
 

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London forecast
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London

London enjoyed occupancy growth of 2.6% and ADR gains of 6.3% driving RevPAR growth of 9%, compared to the same period last year. The surge in overseas tourism has been boosted by North American visitors, with sterling at the lowest it’s been against the dollar for 30 years. The results are still remarkable against the backdrop of an uncertain corporate and consumer outlook, recent terrorist attacks, and high levels of new supply openings. The tourism boom means that for 2017 as a whole, our revised forecast is now much stronger than we anticipated in March this year. We now forecast year-on-year London occupancy growth of 2.3% and a robust RevPAR gain of almost 6% this year in 2017.

PwC forecast for 2018

So why do we think the pace of growth is unsustainable? We still forecast growth in 2018, but expect the inbound holiday boost from the weak pound to slow down.Inbound business travel trends are also reported down. New hotel room openings are running very high, with continued increase in new branded budget supply and competition from alternative accommodation choices. Overall, we think the current pace of hotel performance growth is not sustainable through the second half of the year and into 2018. Yes, the boost from the weak pound is likely to continue but we expect growth will be weaker. So far trading has been very good but, after 4 months of double digit or close to double digit RevPAR growth, June and July have seen marginal occupancy declines and more moderate RevPAR growth. Some London hotels recently reported weaker weekend domestic demand and some luxury operators stated having seen a softening in demand from Middle Eastern markets. Looking to 2018, the biennial Farnborough International Air Show returns, it’s one of the largest events in the aerospace calendar and will help provide an uplift for hotels in London and the south east. A more unquantifiable catalyst will be how some districts, attractions and hotels capitalise on the arrival of Crossrail during 2018 and beyond. We forecast year-on-year London occupancy growth of 0.2% in 2018, taking occupancy up two percentage points to 83%. ADR growth is forecast to increase by 2.2% in 2018. taking ADR to £148 RevPAR gain will be less than 2017, a further 2.4% in 2018, reaching £123 in 2018.

Regional outlook

H1 2017 saw hoteliers in Edinburgh, Cardiff and Belfast, like London, see a boost from the exchange rate attracting international holiday travellers and this has pushed their RevPAR performance into double digit growth. Edinburgh and Belfast have seen ADR gains alone of 14.8% and 13% whereas Cardiff’s additional hosting of the Champions League Final in June, helped lift occupancy and rates and pushed RevPAR to almost 11% RevPAR growth in the first half of the year. Plymouth, Sheffield, Glasgow, York and Liverpool have also seen robust growth. Hull has enjoyed City of Culture status in 2017 and hotels are reported to have seen a 13% occupancy lift in Q1 2017. In the first few weeks following the Manchester Arena bombing attack on 22 May, hotel general managers in the city’s hotel association reported a softening demand for hotel rooms. Recent coverage suggests that while there was a lot of uncertainty, that feeling is starting to change now, with tourists, visitors and families returning to stay in the city’s hotels.

PwC forecast for 2018

Regional occupancies have climbed back into the 70s since 2011 and have been creeping up since then. Our forecast for 76% this year and in 2018 would still be an achievement given an additional 7,500 rooms added in H1 2017. Indeed, the trend is driven partly by a continuing structural supply shift towards a greater proportion of budget rooms which traditionally operate at high occupancy levels. ADR continues to recover. In 2018 additional ADR growth of 2% is forecast. This means RevPAR growth will be 2.3% in 2018, nudging RevPAR from £52 in 2015 to £55 by 2018.

Regional outlook
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Our latest view is for UK GDP growth to slow gradually from 1.8% in 2016 to around 1.5% in 2017 and 1.4% in 2018 as the effects of the weaker pound on inflation and continued Brexit-related uncertainty feed through. Our views on growth are similar to the latest consensus forecasts but slightly lower than the last OBR forecasts in the March 2017 Budget. Consumer spending growth is expected to moderate in 2017-18 as inflation bites into real spending power. So far, consumers have offset this in part through higher borrowing, but there are limits to how much further this can go. Hotels also report that the cost of labour has been pushed up as it becomes harder to fill vacant positions.

UK hotel demand drivers remain largely positive across the UK as the weak pound boosts record inbound holiday travel volumes. Recent terrorist events have had a shocking but limited impact on visitation levels. However, decelerating UK economic growth and uncertainty around Brexit policy issues look to have dampened corporate travel demand. The outlook for global leisure travel remains positive.

Strong trading fundamentals and consumer demand for modern and refurbished branded products in new and existing locations is driving new development. Demand is polarised between three and four star brands and branded budgets. In London luxury hotel development is also active. A range of alternative accommodation providers such as serviced apartments, hostels, aparthotels and shared economy products are increasingly competing with hotels for the same guests.

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Deal talk

There has been a strong correlation between deal activity and market performance growth over the past 8 years, with deal volume only exceeding the RevPAR growth in 2015, which had returned to normalised levels. We forecast this tracking of deal activity to RevPAR growth to continue into 2017 with forecast volumes of £5.3bn, representing year on year volume growth of +43%.

What to Expect for 2018?

We forecast both overseas inbound and domestic investment into the hotel sector to continue into 2018, with the ongoing growth in investment appetite into the sector by the more institutional and mainstream real estate investors. It will be interesting to see the outcome of the current portfolio deals to see whether vendor price expectations are achieved, and the impact this may have on the strategy for any future portfolio deals running into 2018. It also remains to be seen the longer term effect of the drive by China to limit foreign investment, once any of the larger portfolio deals do return. Considering these factors, combined with forecast slower RevPAR growth across the UK, overall we expect 2018 deal volumes to reach levels c.10% lower than the current year, at around £4.8bn.

Deal talk
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Contact us

David Trunkfield
UK Leader of Industry for Hospitality and Leisure
Tel: +44 (0)20 7804 6397
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Samantha Ward
Hotels Sector Leader
Tel: +44 (0)20 7212 2974
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Liz Hall
Head of Hospitality & Leisure Research
Tel: +44 (0)20 7213 4995
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