2018 UK hotels forecast update

Weaker growth checks in for the UK hotel market?

Our revised outlook for the UK hotel sector in 2018 reflects:

Relatively lacklustre UK economic growth (despite a strong global economy)
A continued squeeze on real incomes
Shaky inbound travel trends
A large supply spike in London this year, with more new rooms opening than we saw during the last growth peak in 2012
The UK and particularly London is still enjoying high performance and in many cases record occupancies

Slower growth and Brexit uncertainty

Weaker UK economic growth is expected to persist in 2018, as considerable uncertainty still relates to Brexit. We estimate GDP growth to remain at around 1.5% in 2018, edging up to 1.6% in 2019. In addition, there remain pressures on UK household spending and real income growth is expected to continue to be subdued in 2018. While stronger global growth should help cushion inbound business and leisure travel to the UK, weaker UK GDP is likely to depress Average Daily Rate (ADR) growth.

Supply vs demand

Another issue impacting revenue per available room (RevPAR) growth is the impact of expected high levels of new supply, which we believe will dampen occupancy during 2018, especially in London. A marked supply spike in new room openings in 2018 means London could see over 9,000 rooms opening – more than the 8,000 rooms that opened in 2012, the Olympic year.

Inbound tourism fears

Despite strong GDP growth in key inbound markets, there are indications that 2017’s boost to inbound holidays from the weak pound may have started to ‘fizzle out’ towards the end of last year. A recent survey by UK Inbound reports sliding business confidence in prospects for inbound travel in 2018*. London hoteliers confirm some leisure segment weakness since the autumn, especially at weekends. 2017 safety and security concerns have been cited as a factor in 2018 forward bookings cancellations.

It’s not all gloom

There’s still some growth; London enjoys very high performance metrics and around the UK, key regional cities are also enjoying solid metrics and in many cases record occupancies. Additional uplift should come from the Royal Wedding in May, Farnborough International Air Show in July and many unique sporting and cultural events around the country, including the European Sports Championships in Scotland, the Gymnastics World Cup in Birmingham and Liverpool welcomes the Terracotta Warriors to the World Museum from February to October 2018.

A strong pipeline of portfolio deals expected for 2018

In terms of deals there has been a significant movement in investor profile, away from the traditional PE groups (who are likely to look towards mainland Europe in search of higher returns) to more institutional investors seeking to invest in long-term, fixed leased hotel assets. Simultaneously we have seen a shift in the preferred operating structure, away from the more traditional owner operated groups or long term encumbrance with brand management contracts, to a rise in the type of investors looking for either long term operator leases or franchising alongside potentially cheaper and more flexible third party operating contracts. Overall we forecast 2018 deal volume in the UK to be around £6.0 billion, up c. 22% from the £4.9 billion achieved in 2017.